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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _______________
Commission file number 1-4147
THE UPJOHN COMPANY
(Exact name of registrant as specified in its charter)
Delaware 38-1123360
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7000 Portage Road, Kalamazoo, Michigan 49001
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (6l6) 323-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $1 par value New York Stock Exchange
Rights to Purchase Preferred Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The registrant is unable to determine the amount of shares owned by
non-affiliates (within the meaning of such term under applicable regulations of
the Securities and Exchange Commission) but estimates the aggregate market
value of the voting stock held by non-affiliates of the registrant (based upon
the NYSE--Composite Transactions closing price on January 31, 1995 as reported
in The Wall Street Journal and treating all executive officers and directors of
the Company as affiliates) was approximately $5,699,680,172.
The number of shares of Common Stock, $1 par value, outstanding as of
January 31, 1995 is 173,143,319 shares (excluding 17,448,204 treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1994 Annual Report to Shareholders are incorporated by
reference into Parts I and II.
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The following trademarks of The Upjohn Company are included in this report:
ANSAID(R), ATGAM(R), CAVERJECT(R), CLEOCIN PHOSPHATE(R), CLEOCIN T(R),
CLEOCIN(R), COLESTID(R), CORTAID(R), CYTOSAR-U(R), DELTA ALBAPLEX(R),
DEPO-PROVERA(R), DRAMAMINE(R), GLYNASE(R), HALCION(R), KAOPECTATE(R),
LINCOCIN(R), LINCOMIX(R), LINCO-SPECTIN(R), LUTALYSE(R), MEDROL(R), MGA(R),
MICRONASE(R), MOTRIN(R), MYCITRACIN(R), NAXCEL(R), PIRSUE(R), PREPIDIL(R),
PresTab(R), PROSTIN E2(R), PROSTIN VR PEDIATRIC(R), PROVERA(R), ROGAINE(R),
SOLU-CORTEF(R), SOLU-MEDROL(R), UNICAP(R), XANAX(R), VANTIN(R) and ZEFAZONE(R).
ALTACE, a trademark of Hoechst Aktiengesellschaft, is included in this
report.
DOXIDAN and SURFAK, trademarks of Hoechst-Roussel Pharmaceuticals Inc., are
included in this report.
LUVOX, a trademark of Solvay Duphar B.V. is included in this report.
OGEN, a trademark of Abbott Laboratories is included in this report.
ZOVIRAX, a trademark of Burroughs Wellcome Co. is included in this report.
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PART I
ITEM 1. BUSINESS
The Upjohn Company (the "Company") operates in the pharmaceutical products
segment, which includes both human pharmaceutical products and animal health
products.
The Company historically has engaged primarily in the research,
development, production and sale of prescription pharmaceuticals, and it
continues to be one of the largest drug manufacturers in the United States.
The Company manufactures a broad line of prescription drugs, primarily central
nervous system agents, nonsteroidal anti-inflammatory and analgesic agents,
antibiotics, steroids, oral antidiabetes agents and a hair growth product.
These are principally products which were developed or invented in its
laboratories or for which licenses to make, use and sell have been obtained
from others.
The Company also manufactures for distribution to the general public
certain nonprescription drugs and manufactures pharmaceutical chemicals for use
in its own products and for bulk sales.
The Company's most important pharmaceutical products, many of which it
sells under other trademarks in foreign markets or as generic products, are
discussed below, together with a summary indication of their principal uses and
applications. Except where specifically noted, none of these products are
subject to significant patent protection or market exclusivity.
The Company produces two major drugs for central nervous system ("CNS")
disorders. XANAX Tablets, containing alprazolam, are used for symptomatic
relief of anxiety with and without depressive symptoms and for the treatment of
panic disorder. The U.S. patent for the anti- anxiety indication of XANAX
expired in late 1993, resulting in intense generic competition that caused a
significant decline in sales of XANAX, which was partially offset by the
Company's sales of generic alprazolam. The use patent for the panic disorder
indication for XANAX expires in 2002. HALCION Tablets, containing triazolam,
are a hypnotic agent for the treatment of insomnia. The U.S. patent on HALCION
also expired in late 1993, resulting in generic competition that reduced sales
of the product.
The Company's major oral antidiabetes agents are MICRONASE Tablets,
containing glyburide, and GLYNASE PresTab Tablets, also containing glyburide,
for the treatment of non-insulin-dependent diabetes.
The Company markets ANSAID Tablets, a nonsteroidal anti-inflammatory
product containing flurbiprofen, for treatment of osteoarthritis and rheumatoid
arthritis, and MOTRIN Tablets, a nonsteroidal anti-inflammatory product
containing ibuprofen, used in the treatment of rheumatoid arthritis and
osteoarthritis and as a general analgesic for mild to moderate pain, including
dysmenorrhea.
The Company and its subsidiaries provide a broad line of antibiotic
products including CLEOCIN and LINCOCIN products. CLEOCIN PHOSPHATE is an
injectable form of clindamycin that is used in the treatment of certain
life-threatening anaerobic infections. CLEOCIN T is a topical formulation for
treatment of acne. CLEOCIN is used to treat bacterial vaginosis. LINCOCIN is
used
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in the treatment of serious infections caused by many strains of gram-positive
bacteria. Upjohn has exclusive U.S. marketing rights to VANTIN Tablets and
Oral Suspension, an advanced cephalosporin antibiotic, under patents licensed
from Sankyo Company, Ltd., which rights will become semi-exclusive in 1997. The
Company also markets ZEFAZONE Sterile Powder, another cephalosporin antibiotic,
under license from Sankyo.
The Company markets several steroid hormones having a variety of uses,
including the treatment of allergic reactions, inflammation, asthma and certain
hormone deficiencies. The most important synthetic hormone is PROVERA Tablets,
which is a female sex hormone replacement agent. The Company produces various
forms of chemical modifications of hormones, under the trademark MEDROL, which
is used to treat a number of inflammatory and allergic conditions. SOLU-CORTEF
Sterile Powder and SOLU-MEDROL Sterile Powder are injectable corticosteroid
products. The Company also markets DEPO-PROVERA Contraceptive Injection, which
will lose marketing exclusivity in the U.S. in late 1995, and OGEN Tablets and
Vaginal Cream, an estrogen replacement product, licensed from Abbott
Laboratories.
The Company also markets certain prostaglandin products, including PROSTIN
E2 Vaginal Suppository, which is generally used for pregnancy disorders, and
PROSTIN VR PEDIATRIC Sterile Solution, for cardiovascular use. PREPIDIL Gel,
used for cervical ripening, is protected by U.S. patents until 2003.
The Company produces and sells ROGAINE Topical Solution, a 2% solution of
minoxidil applied topically to restore hair growth in men with male pattern
baldness and in women with androgenetic alopecia, or hereditary hair loss. The
product is also sold in numerous foreign countries. The United States patents
covering ROGAINE expire in early 1996.
Other prescription drugs include ATGAM Sterile Solution, an
immunosuppressant product, COLESTID Granules, Flavored Granules and Tablets, a
cholesterol-lowering agent, and CYTOSAR-U Sterile Powder, used for the
treatment of leukemia. CAVERJECT Sterile Powder, a patient injection for home
treatment of erectile dysfunction, has been approved for marketing in several
foreign countries.
Geneva Pharmaceuticals, Inc., a subsidiary of CIBA-GEIGY Corporation, has
certain rights to market generic versions of the Company's XANAX, HALCION,
ANSAID, MICRONASE and CLEOCIN T products under an agreement with the Company.
The Company also markets certain generic products through its subsidiary,
Greenstone Ltd.
The Company manufactures and distributes other products which do not
require a prescription, including MOTRIN IB Tablets, Caplets and Gelcaps, an
analgesic; MOTRIN IB Sinus Tablets and Caplets, a sinus pain formula;
KAOPECTATE products, for diarrhea; CORTAID products, anti-inflammatory topical
products; the family of UNICAP vitamin products; DRAMAMINE, anti-motion
sickness medicines, and MYCITRACIN, an antibiotic ointment for treatment of
minor skin infections and burns. The Company also holds a license from
Hoechst-Roussel Pharmaceuticals Inc. for exclusive United States rights to the
nonprescription laxative products DOXIDAN and SURFAK. The Company also has a
U.S. marketing arrangement with McNeil Consumer Products Company whereby the
Company will receive access to several ibuprofen-based and other products being
developed by McNeil.
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The Company has an agreement with Biopure Corporation under which the
Company will acquire sales and marketing rights to any hemoglobin-based oxygen
carrier products developed for human or animal use by Biopure.
The Company has joint marketing agreements with Burroughs Wellcome Co. to
jointly market ZOVIRAX, a product for the treatment of genital herpes and
shingles, and with Solvay S.A. to jointly market Solvay's LUVOX (fluvoxamine),
a product for the treatment of obsessive-compulsive disorder and depression
(the product is approved for depression in Europe and Canada but not yet in the
United States). The Company's co- marketing agreement with Hoechst-Roussel
Pharmaceuticals Inc. for their ALTACE product, for the treatment of
hypertension, was terminated as of January 1, 1995.
The Company has formed Greenstone Healthcare Solutions to participate in
the disease management business, providing services in prevention, screening,
diagnosis, treatment, case management, education and outcome assessment.
INTERNATIONAL PHARMACEUTICAL OPERATIONS
The Company manufactures and sells throughout the world many of the
prescription pharmaceuticals described above. The principal markets are
Western Europe, Japan, the Pacific Region, Latin America, the Middle East and
Canada. Smaller markets are in Eastern Europe, Russia, India, China and South
America. The Company competes with a large number of other companies primarily
on the basis of product differentiation and price. The most significant
product areas for the Company's international sales are antibiotics, central
nervous system agents and corticosteroids.
Delta West Pty. Limited, an Australian subsidiary of the Company,
manufactures and distributes a broad line of generic products for hospital
applications, with particular emphasis on injectable oncolytic products in
plastic containers, primarily in Australia, New Zealand and Southeast Asia.
Delta West is in the process of expanding its export efforts through the
Asia-Pacific region and other markets. Delta West and the Company have formed
a collaboration with Gensia Laboratories Inc. to develop and market Delta West
and Gensia generic oncology and pain products in the United States.
COMPETITION
There are a large number of significant competitors in the United States in
the sale of prescription and nonprescription pharmaceutical products. A major
feature of this competition is the effort to discover, develop and introduce
new or improved products for the treatment and prevention of disease. Other
competitive features include price, quality, dissemination of technical
information and medical support advice. Over the last few years, the
pharmaceutical industry has experienced increased vertical and horizontal
consolidation, and the breadth of products offered and distribution
capabilities of a company may become a competitive feature.
Significant changes in marketing conditions are occurring in both the U.S.
and foreign pharmaceutical markets, including decreased pricing flexibility,
restrictions on promotional and marketing practices and the impact of managed
care, particularly with respect to product selections and pricing concessions.
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See "Governmental Regulation" under "General" below for a description of
the competitive effects of FDA regulation.
DISTRIBUTION
The Company has a U.S. pharmaceutical sales force of technically trained
representatives who call on physicians, pharmacists, hospital personnel, HMOs
and other managed health care organizations and wholesale drug outlets. The
Company has several contractual relationships with health maintenance and
hospital group purchasing organizations. The Company also recently developed a
disease management group to provide non-product-specific services. The Company
has realized no revenues from these services to date. Most sales of
pharmaceutical products are made directly to pharmacies, hospitals, chain
warehouses, wholesalers and other distributors, although some are made to
physicians and governments. Nonprescription drugs are also sold to other
retail stores. Domestic customers are served from several distribution centers
located throughout the United States. Separate sales forces handle
nonprescription drug sales and foreign pharmaceutical sales.
PUERTO RICO OPERATIONS
The Company conducts substantial pharmaceutical manufacturing operations in
Puerto Rico through a wholly owned subsidiary. Under current law, the earnings
from this subsidiary will be partially exempt from both United States and
Puerto Rico income taxes. The federal Omnibus Budget Reconciliation Act of
1993 will reduce in future years the amount of Puerto Rico tax benefits
available under Section 936 of the Internal Revenue Code (ultimately reducing
the benefit under the current law by 60 percent). If earnings from the
Company's Puerto Rican subsidiary are repatriated in the form of a dividend to
the Company, such earnings would be subject to a Puerto Rican withholding tax
of up to 10% of the amount repatriated. Under the Puerto Rico tax exemption
grant, certain credits are available to reduce Puerto Rican withholding taxes.
See Notes E and H of "Notes to Consolidated Financial Statements" in the 1994
Annual Report to Shareholders (Exhibit 13), which is hereby incorporated by
reference, for further information, including the effect on the Company's net
earnings of the Puerto Rican tax exemption grant and the investment of earnings
from Puerto Rican operations.
ANIMAL HEALTH
The Company develops, manufactures and sells animal pharmaceutical products
and animal feed additives, the sales of which fluctuate with changes in the
agricultural economy. These products are sold to veterinarians, feed
manufacturers, distributors and growers who choose the Company's products
primarily because of their efficacy and suitability for particular uses, as
well as price and quality. Major products include NAXCEL Sterile Powder, an
antibiotic for bovine and swine respiratory disease and early chick mortality;
LINCO-SPECTIN Soluble Powder and Premix, a combination lincomycin/spectinomycin
antibiotic; LINCOMIX 20 and LINCOMIX 50 Feed Medication, which are
feed-additive antibiotics; MGA Premix, which is a growth-promoting feed
additive for feedlot heifers; various products for the treatment of mastitis
including PIRSUE; DELTA ALBAPLEX Tablets and LINCOCIN, which are small-animal
antibiotics; and LUTALYSE Sterile Solution, which is used to synchronize
breeding performance in mares and cattle. In addition, the Company sells a
line of animal health vaccines through Oxford Veterinary Laboratories, Inc.
(Bio-Vac Labs, Inc.).
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SALE OF ASGROW SEED COMPANY AND COBB-VANTRESS, INC.
In late 1994, the Company sold Asgrow Seed Company, the Company's
subsidiary engaged in the vegetable and agronomic seed business. In 1994, the
Company also sold its 50-percent owned chicken-breeding joint venture with
Tyson Foods, Inc., called Cobb-Vantress, Inc.
GENERAL
RESEARCH AND PATENTS
Total research and development expenditures have increased almost every
year for more than a decade, amounting to $553.3 million in 1992, $612.5
million in 1993 and $607.2 million in 1994. There are continuing research
programs principally in the areas of cardiovascular diseases, central nervous
system diseases, infectious diseases, atherosclerosis and thrombosis,
hypersensitivity diseases, cancer, diabetes, hair growth, virology, AIDS,
trauma and biotechnology.
The Company considers that the overall protection from its United States
and foreign patents and trademarks and from licenses under patents belonging to
others is of material value. However, it is believed that no single patent or
license is of material importance in relation to the business as a whole.
Rights under patents and know-how are both given and taken. In 1994, the
Company recorded income for use of know-how and patents totaling approximately
$6.4 million and expenses totaling approximately $39.9 million.
RAW MATERIALS AND ENERGY
From time to time, for a number of reasons, there has been difficulty in
obtaining certain raw materials for the manufacture of some pharmaceutical
products. However, the principal raw materials used by the Company are at this
time readily available. Possible effect on the Company of increased costs and
possible shortages of material or energy in the future cannot be predicted.
ENVIRONMENT
Significant capital and operating expenses will be incurred to address
environmental remediation and control in connection with the phasing out of
industrial chemical operations at the Company's North Haven, Connecticut plant,
improving controls on air emissions at the Kalamazoo manufacturing facilities,
addressing other environmental issues at all Company facilities and the
Company's involvement in certain Superfund sites. The information under the
caption "Financial Review" and Notes J and K of "Notes to Consolidated
Financial Statements" in the 1994 Annual Report to Shareholders (Exhibit 13) is
hereby incorporated by reference. Since several capital projects are
undertaken for both environmental control and other business purposes, such as
production process improvements, it is difficult to estimate the specific
capital expenditures for environmental control. However, including all such
multi-purpose capital projects as environmental expenditures, it is estimated
that capital expenditures for environmental protection for 1995 and 1996 may
exceed $35
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million and $25 million each year, respectively. Operating expenses in 1994
for compliance with environmental protection laws and regulations are estimated
to have been approximately $50 million. Such operating expenses in 1995 are
estimated to be approximately $60 million. Cash payments charged to
environmental reserves in 1994 totaled $10 million and are expected to be
approximately $15 million in 1995.
Among the sites on the United States Environmental Protection Agency's
("EPA") National Priorities List, in connection with which the Company has been
identified as a potentially responsible party ("PRP"), is the West KL Avenue
Landfill located in Kalamazoo County, Michigan. In September 1991, the Company
and three local governmental units agreed to a consent decree with the EPA,
which has been approved by the United States Department of Justice and entered
by a Federal Court, to undertake necessary remedial action. The costs of
remediation are currently estimated to be $40 million, of which other viable
parties are expected to contribute more than half.
Negotiations with environmental agencies continue in connection with
remediation of the site of the Company's discontinued industrial chemical
operations in North Haven, Connecticut, including an abandoned sludge pile
located on-site. The Company is also in the process of evaluating other
existing environmental conditions at the North Haven, Connecticut facility with
the intention of addressing concerns that may be determined appropriate.
GOVERNMENTAL REGULATION AND LEGAL COMPLIANCE
The Company's products have for many years been subject to regulation by
federal, state and foreign governments. Such regulation has generally been
aimed at product safety and labeling. In the United States, most human and
animal pharmaceutical products manufactured or sold by the Company are subject
to regulation by the U.S. Food and Drug Administration ("FDA") as well as by
other federal and state agencies. The FDA regulates the introduction of new
drugs, advertising of prescription drug products, good manufacturing,
laboratory and clinical practices, labeling, packaging and record keeping with
respect to drug products. In addition, the FDA reviews the safety and
effectiveness of marketed drugs and may require withdrawal of products from the
market and modification of labeling claims where necessary.
Government approval of new drugs under the federal Food, Drug and Cosmetic
Act requires substantial evidence of safety and efficacy. As a result of this
requirement, as interpreted by the FDA, the length of time and the laboratory
and clinical information required for approval of a New Drug Application
("NDA") is considerable.
The FDA has adopted streamlined procedures for the approval of duplicate
drugs (drugs containing the same active ingredient as the originator's
product), including Abbreviated New Drug Applications ("ANDAs"). Approval of
ANDAs may not be made effective prior to expiration of valid patents. The FDA
has established a similar expedited approval process for antibiotics. The
availability of the ANDA and expedited antibiotic approval processes has
reduced the time period and expense required to obtain FDA approval of some
competing products and facilitated generic competition.
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At the state level, so-called "generic substitution" legislation permits
the dispensing pharmacist to substitute a different manufacturer's version of a
drug for the one prescribed. In a number of states, such substitution is
mandatory unless precluded by the prescribing physician.
Interest in the FDA approval mechanism for duplicate or generic drugs and
"generic substitution" by pharmacists has been increased by limits on
government reimbursement of drug costs in health and welfare programs (Medicare
and Medicaid).
Pharmaceutical manufacturers are required to provide rebates to state
governments for prescriptions covered by Medicaid. Rebates for single-source
and innovator multiple-source drugs are approximately 15 percent of the average
manufacturer price ("AMP") for each drug or the AMP minus the best price a
company offered to any given purchaser (excluding certain federal customers),
whichever was greater. Approximately 8% of the Company's pharmaceutical
business involves Medicaid. In November 1992, ceiling prices were placed on
products sold to the Department of Defense, the Veterans Administration and the
Public Health Service (PHS). In addition, manufacturers are required to sell
products to PHS grantees at the net Medicaid price (AMP minus the Medicaid
rebate). The issue of further price controls on sales of prescription drugs
continues to be considered in Congress and various states, and additional
federal or state legislation to limit prices of prescription drugs is possible.
It is difficult to predict the ultimate effect of streamlined approval of
duplicate or generic drugs, "generic substitution," the Medicaid reimbursement
and rebate programs and possible price limitations. However, the Company
believes that its development of patented and exclusively licensed products may
moderate the impact of programs and legislation focusing mainly on products
available from multiple suppliers.
Similar product regulatory laws are found in most other countries in which
the Company manufactures or sells its products. There, too, the thrust of
governmental inquiry and action has been primarily toward reducing the prices
of prescription drugs.
The Company is subject to administrative action by the various regulatory
agencies. Such actions may include product recalls, seizures of products and
other civil and criminal actions.
INTERNATIONAL OPERATIONS
The Company's international operations are subject to certain risks which
are inherent in conducting business outside the United States, particularly
fluctuations in currency exchange rates, price controls, differing rates of
economic growth, inflation, political instability and varying controls on the
repatriation of earnings.
EMPLOYEES
The Company had 16,900 regular employees on December 31, 1994. The Company
believes that it has good relations with its employees. Employees at several
non-U.S. locations are represented either by freely elected unions or by
legally mandated workers' councils or similar organizations.
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FINANCIAL INFORMATION
Financial information about segment operations appearing in Notes U and V
of "Notes to Consolidated Financial Statements" in the 1994 Annual Report to
Shareholders (Exhibit 13) is hereby incorporated by reference. For additional
information, see discussions included in the "Financial Review" section in the
1994 Annual Report to Shareholders (Exhibit 13), which is hereby incorporated
by reference.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company maintains an Employee Stock Ownership Plan ("ESOP") as part of
The Upjohn Employee Savings Plan. Assets of the ESOP are held through a trust
(the "ESOP Trust"). The ESOP Trust has issued debt securities to the public,
and the Company has unconditionally guaranteed payment of the principal and
interest on the debt securities. Holders of the debt securities have no
recourse against the assets of the ESOP Trust except cash contributions made by
the Company to pay such debt securities, and earnings attributable to such
contributions. A summary description of the liabilities of the ESOP Trust
under such debt securities and of the cash contributions made by the Company to
the ESOP Trust during 1994 is set forth in Note P of "Notes to Consolidated
Financial Statements" in the 1994 Annual Report to Shareholders (Exhibit 13),
which is hereby incorporated by reference.
ITEM 2. PROPERTIES
The Company owns its main pharmaceutical plants and general offices, which
consist of a group of buildings containing approximately 5,000,000 square feet
of floor space, all of which were constructed since 1948 and are considered
adequate for the Company's present needs, on about 500 acres of a 2,200 acre
tract located six miles southeast of Kalamazoo, Michigan. The Company's main
manufacturing building, which is located at the Kalamazoo site, contains about
1,630,000 square feet. Other major buildings at the Kalamazoo site include a
large fermentation plant where antibiotics and steroids are produced, a new
complex used for production of fine chemicals, and buildings devoted to
chemical and fermentation process development. The Henrietta Street complex,
owned by the Company and consisting of approximately 33 acres, includes a group
of buildings aggregating about 2,500,000 square feet that houses the Company's
research laboratories and offices. Pharmaceutical fermentation, production,
warehouse and office facilities, containing approximately 510,000 square feet,
are located on a 259 acre site owned by the Company near Arecibo, Puerto Rico.
The Company also owns or leases distribution warehouses in several major cities
in the United States. The Company owns a 2,140 acre farm complex northeast of
Kalamazoo, which includes the principal offices of the Company's animal health
business, including veterinary research facilities, with offices, laboratory
and farm buildings aggregating about 410,000 square feet. The Company also has
animal health products production and research facilities in several locations
in the United States and in foreign countries.
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ITEM 3. LEGAL PROCEEDINGS
Various suits and claims arising in the ordinary course of business,
primarily for personal injury and property damage alleged to have been caused
by the use of the Company's products, are pending against the Company and its
subsidiaries.
The Company is a defendant in approximately 100 product liability lawsuits
involving its benzodiazepine product, HALCION, some of which seek punitive
damages based on alleged deficiencies in the product approval process and
compliance with regulations.
The U.S. Food and Drug Administration is conducting a review of the FDA's
prior inspection report on HALCION, including an assessment of the conclusions
of the report, the approval of the drug and related FDA processes and
procedures generally, to determine what further FDA action, if any, is
appropriate. The Company cannot predict the outcome of this review.
A shareholder class action complaint is pending in the United States
District Court for the Western District of Michigan against the Company and
certain directors and officers of the Company seeking damages resulting from
the alleged failure of the Company to disclose material adverse information
about HALCION. The court recently denied plaintiff's motion to certify the
action as a class action. Another individual has filed a motion to intervene
as plaintiff and class representative. The plaintiff claims that the failure
to disclose information on HALCION caused the price of the Company's stock to
be artificially inflated, which caused him to purchase Upjohn stock at an
excessive price. Another action makes a derivative complaint alleging a
pattern of misconduct by the Company and named defendants purposely concealing
or minimizing reports of side effects related to HALCION, which allegedly
caused damage and loss to Upjohn as a company, improper election of directors
and payment of excessive incentive compensation and stock option bonuses to the
named defendants. The Company does not believe that there is merit to the
claims and will defend the cases.
In addition to actions involving the West KL Avenue Landfill discussed
above under Item 1, General, Environment, the Company is involved in several
administrative and judicial proceedings relating to environmental matters,
including actions brought by the U.S. EPA and state environmental agencies for
cleanup at approximately 40 "Superfund" or comparable sites. The Company's
estimate of the ultimate cost to be incurred in connection with these
environmental situations could change due to cleanup procedures to be employed,
if any; the cost of cleanup; and the Company's share of a site's cost.
The Company discharges certain cooling water, storm water runoff, and non
process wastewater from its production facility in Kalamazoo County, Michigan,
to nearby surface waters. While no formal enforcement action has been taken to
date, the State of Michigan has asserted that some of the Upjohn discharges may
have been in violation of applicable law and regulation. The State has
indicated an intent to seek enforcement through an administrative order with
fines and penalties in excess of $100,000.00.
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Another pharmaceutical company has sued this Company for patent
infringement regarding the marketing of a non-prescription
ibuprofen/pseudophedrine combination product seeking an injunction against
further sales and treble damages.
The Company is a party along with at least 30 other defendants (both
manufacturers and wholesalers) in several federal civil antitrust lawsuits
which have been or are in the process of being consolidated and transferred to
the Federal District Court for the Northern District of Illinois. These suits
seek treble damages and injunctive relief for alleged price discrimination and
price fixing. Specifically, these actions allege that Upjohn and the other
named defendants violated: (1) the Robinson-Patman Act by giving substantial
discounts to mail-order pharmacies and HMOs without according the same
discounts to retail drugstores and chain distributors, and (2) Section 1 of the
Sherman Antitrust Act by entering into illegal vertical combinations with
wholesalers to sell brand-name drugs to favored purchasers--including
hospitals, nursing homes and HMOs--at discounted prices and by entering into
horizontal combinations allegedly restricting certain discounts and rebates to
only benefit favored customers. In addition, similar actions have been brought
in Alabama, California and Wisconsin state courts.
Based on information currently available and the Company's experience with
lawsuits of the nature of those currently filed or anticipated to be filed
which have resulted from business activities to date, the amounts accrued for
product and environmental liabilities arising from the litigation and
proceedings referred to above are considered to be adequate. Although the
Company cannot predict the outcome of individual lawsuits, the ultimate
liability should not have a material effect on consolidated financial position;
and unless there is a significant deviation from the historical pattern of
resolution of such issues, the ultimate liability should not have a material
adverse effect on the Company's results of operations or liquidity.
See the information under the caption "Other Items" in the "Financial
Review" section and Notes J and K of "Notes to Consolidated Financial
Statements" in the 1994 Annual Report to Shareholders (Exhibit 13) for further
information concerning litigation and environmental matters, which information
is hereby incorporated by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1994.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol UPJ. As of January 31, 1995, there were 33,525 holders of record of
the Company's Common Stock, $1 par value. In addition, there were 13,324
accounts under the Company's Dividend Reinvestment Plan which are not included
in the number above.
Information regarding the market prices and dividends for the Company's
Common Stock and related stockholder matters appearing under the caption
"Quarterly Data" in the 1994 Annual Report to Shareholders (Exhibit 13) is
hereby incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information under the captions "Financial Review," "Notes to
Consolidated Financial Statements," "Selected Financial Data", "Eleven-Year
Summary of Continuing Operations" and "Quarterly Data" in the 1994 Annual
Report to Shareholders (Exhibit 13) is hereby incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information under the caption "Financial Review" in the 1994 Annual
Report to Shareholders (Exhibit 13) is hereby incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information under the caption "Report of Independent Accountants," the
consolidated financial statements, and the information under the captions
"Selected Financial Data" and "Quarterly Data" in the 1994 Annual Report to
Shareholders (Exhibit 13) is hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE> 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors of the Company, who are elected annually for a three-year
term, are as follows:
RICHARD H. BROWN, AGE 47, VICE CHAIRMAN OF AMERITECH CORP., A
TELECOMMUNICATIONS COMPANY. Mr. Brown was elected Ameritech vice chairman in
January 1993. He joined Illinois Bell as president and chief executive officer
in 1990 and, prior to that, he was executive vice president of United Telecom
and U. S. Sprint. He is a member of the Economic Club of Chicago, trustee,
Rush-Presbyterian-St. Luke's Medical Center, vice chairman of the board of
trustees of Ohio University Foundation and serves actively in many non-profit
organizations in Illinois. Mr. Brown is a director of Ameritech Corp. and
serves on a number of other boards. He has served as a Director of The Upjohn
Company since September 1993 and is a member of the Compensation and Incentive;
the Nominating; and the Social Responsibility Committees of the Board of
Directors.
FRANK C. CARLUCCI, AGE 64, CHAIRMAN, THE CARLYLE GROUP, A MERCHANT BANK IN
WASHINGTON, D.C. Mr. Carlucci was vice chairman of The Carlyle Group from 1989
to 1993. He served as U.S. Secretary of Defense from 1987 to 1989. Mr.
Carlucci is currently on the board of directors of Ashland Oil, Inc.; Bell
Atlantic Corporation; Connecticut Mutual Life Insurance Company; General
Dynamics Corporation; Kaman Corporation; Neurogen Corporation; Northern Telecom
Limited; The Quaker Oats Company; SunResorts, Ltd., N.V.; Texas
Biotechnological Corporation; Westinghouse Electric Corporation; and serves on
the board of trustees for the nonprofit Rand Corporation. Mr. Carlucci has
served as a Director of The Upjohn Company since 1990 and is a member of the
Audit; the Compensation and Incentive; the Finance; and the Nominating
Committees of the Board of Directors.
M. KATHRYN EICKHOFF, AGE 55, PRESIDENT, EICKHOFF ECONOMICS INCORPORATED,
ECONOMIC CONSULTANTS. Ms. Eickhoff is the former associate director for
Economic Policy, United States Office of Management and Budget. She serves as
a director of AT&T, National Westminster Bancorp. Inc. and Tenneco Inc. Ms.
Eickhoff is a member of several business organizations including The Conference
of Business Economists, The Economic Club of New York and the National
Association of Business Economists. She served as a Director of The Upjohn
Company from 1982 to 1985 and returned as a Director in 1987. She is a member
of the Audit; the Executive; the Finance; and the Nominating Committees of the
Board of Directors.
ANTONIO M. GOTTO, JR., M.D., AGE 59, CHAIRMAN OF THE DEPARTMENT OF MEDICINE
AT BAYLOR COLLEGE OF MEDICINE. Dr. Gotto was appointed to the Board of
Directors of The Upjohn Company in November 1994. He is Distinguished Service
Professor and Chairman of the Department of Internal Medicine at Baylor College
of Medicine. He holds the J.S. Abercrombie Chair of Atherosclerosis Research
and the Bob and Vivian Smith Chair in Internal Medicine. He is Chief of the
Internal Medicine Service at The Methodist Hospital and Ben Taub County
Hospital in Houston, Texas. He is a director of the Medtronic Corporation. He
is a former member of: the National Academy of Sciences - Institute of
Medicine; the National Heart, Lung, and Blood Advisory Council for the National
Institutes of Health; and the National Diabetes Advisory Board. He has served
as National President of the American Heart Association. He is currently
President of the International
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<PAGE> 15
Atherosclerosis Society, Co-Chairman of the U.S.-Russian and U.S.-Italian
Cardiovascular Workgroups and Secretary of the Texas and district Rhodes
Scholar Selection Committee. He has received many awards, honorary degrees and
recognition by foreign governments. He is a member of the Audit and the Social
Responsibility Committees of the Board of Directors.
DARYL F. GRISHAM, AGE 68, PRESIDENT AND CHIEF EXECUTIVE OFFICER, PARKER
HOUSE SAUSAGE COMPANY. Mr. Grisham joined Parker House Sausage Company in
1954. He has been a director of that company since 1961 and was promoted to
his current position in 1969. Mr. Grisham is a former director for G. D.
Searle and Company and Illinois Bell Telephone Co. He serves as a director of
Harris Bankcorp, Inc.; Lincoln Park Zoological Society and the Rehabilitation
Institute of Chicago. He also serves as a trustee for the Chicago Museum of
Science & Industry and Northwestern University. He has served as a Director of
The Upjohn Company since 1989 and is a member of the Compensation and
Incentive; the Executive; the Nominating; and the Social Responsibility
Committees of the Board of Directors.
LAWRENCE C. HOFF, AGE 66, FORMER PRESIDENT AND CHIEF OPERATING OFFICER OF
THE COMPANY. Mr. Hoff has long been active in major industry and educational
associations including having served as director, American Diabetes
Association, Inc.; trustee, Borgess Medical Center; director, Council on Family
Health; chairman, Pharmaceutical Research and Manufacturers of America; member,
U.S. Chamber of Commerce, International Policy Committee. He holds an honorary
Doctor of Science in Pharmacy degree from Massachusetts College of Pharmacy and
Allied Health Sciences, and is currently a director of Alpha Beta Technology,
Inc.; Curative Technologies, Inc.; and MedImmune, Inc. He has served as a
Director of The Upjohn Company since 1973 and is a member of the Audit and the
Social Responsibility Committees of the Board of Directors.
GERALDINE A. KENNEY-WALLACE, AGE 51, PRESIDENT AND VICE-CHANCELLOR OF
MCMASTER UNIVERSITY, HAMILTON, ONTARIO, CANADA. Dr. Kenney-Wallace is a member
of the board of directors of the Bank of Montreal, Dofasco Inc., DMR Inc.,
General Motors (Canada) and Northern Telecom Ltd. She serves on the advisory
board of the Canadian Foundation for AIDS Research, the Manning Foundation, the
Canada-Japan Forum, the Canadian National Roundtable on the Environment and the
Economy and the Singapore National Science and Technology Boards. During her
scientific career in lasers, ultra-fast phenomena and opto-electronics, Dr.
Kenney-Wallace has received numerous honors and scientific awards. She has
served as a Director of The Upjohn Company since 1993 and is a member of the
Audit; the Finance; and the Social Responsibility Committees of the Board of
Directors.
WILLIAM E. LAMOTHE, AGE 68, FORMER CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER OF KELLOGG COMPANY, A FOOD COMPANY. Mr. LaMothe is a former
director of the Food and Drug Law Institute, Kimberly Clark Corporation, Unisys
Corporation and the Western Michigan University Foundation. He is currently a
director of Allstate Insurance Companies, Kellogg Company and Sears Roebuck and
Company; and he is a member of the board and a trustee for the W. K. Kellogg
Foundation Trust. Mr. LaMothe serves on the board of governors of the Battle
Creek Community United Arts Council and The Battle Creek Community Foundation.
He has served as a Director of The Upjohn Company since 1986 and is a member of
the Audit; the Compensation and Incentive; the Executive; and the Nominating
Committees of the Board of Directors.
JERRY R. MITCHELL, M.D., AGE 53, VICE CHAIRMAN OF THE BOARD AND PRESIDENT,
UPJOHN LABORATORIES. Previously, Dr. Mitchell had been Executive Vice
President and President, Upjohn
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<PAGE> 16
Laboratories (1991-92); and Senior Vice President and President, Upjohn
Laboratories (1990). Prior to joining The Upjohn Company, Dr. Mitchell was a
professor of internal medicine and the director of the Center for Experimental
Therapeutics, Baylor College of Medicine and Affiliated Hospitals. During his
distinguished career, Dr. Mitchell has served on many national advisory boards
and committees and has received numerous honors and scientific awards. He has
published two books and has written hundreds of manuscripts and abstracts. Dr.
Mitchell has been a Director of The Upjohn Company since 1991.
WILLIAM D. MULHOLLAND, AGE 68, FORMER CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER OF THE BANK OF MONTREAL. Mr. Mulholland is currently a
director of the Bank of Montreal; and Canadian Pacific Ltd. He is a trustee of
Queen's University and a member of the Advisory Committee on Canadian Studies
at the School of Advanced International Studies, Johns Hopkins University. Mr.
Mulholland has received honorary Doctor of Laws degrees from Memorial
University and Queen's University. He has served as a Director of The Upjohn
Company since 1977 and is a member of the Compensation and Incentive; the
Executive; the Finance; and the Nominating Committees of the Board of
Directors.
WILLIAM U. PARFET, AGE 48, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF
RICHARD-ALLAN MEDICAL INDUSTRIES, INC., A MANUFACTURER OF SURGICAL EQUIPMENT
AND MEDICAL SUPPLIES. Prior to joining Richard-Allan in October 1993, Mr.
Parfet had been Vice Chairman of the Board of the Company, and was President
(1991-93) and Executive Vice President (1989-91) before that. Mr. Parfet
serves on various boards of directors, including Bissell, Inc., CMS Energy
Corporation, the Financial Accounting Foundation, Flint Ink Corporation, Old
Kent Financial Corporation, Stryker Corporation and Universal Foods, Inc. He
has served as a Director of The Upjohn Company since 1985 and is a member of
the Finance and the Social Responsibility Committees of the Board of Directors.
LEY S. SMITH, AGE 60, PRESIDENT AND CHIEF OPERATING OFFICER OF THE COMPANY.
Mr. Smith was elected President, Chief Operating Officer and Acting Chief
Executive Officer in 1993; he became Vice Chairman of the Board in 1991; and
was elected Executive Vice President in January 1989. He is currently a member
of the Borgess Medical Center Board of Trustees and board member for the
Biopure Corporation. Mr. Smith is active in a wide variety of business,
community, and medical- and pharmaceutical-related activities, including the
Pharmaceutical Research and Manufacturers of America; the Virginia Neurological
Institute; the Health, Welfare and Retirement Income Task Force of the Business
Roundtable; and the Greater Kalamazoo United Way. He has served as a Director
of The Upjohn Company since 1989.
JOHN L. ZABRISKIE, AGE 55, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE
OFFICER OF THE COMPANY. Prior to joining the Company in 1994, Dr. Zabriskie
had spent his entire career with Merck & Co., Inc. During his last five years
with Merck, he held several officer positions in sales, marketing, public
affairs and manufacturing, serving most recently as executive vice president of
Merck & Co., Inc., and president, Merck Manufacturing Division. He is active
in the debate over U. S. health care reform as a member of the Healthcare
Leadership Council and past member of the Jackson Hole Group for Healthcare
Reform. He is also active in the Pharmaceutical Research and Manufacturers of
America. Dr. Zabriskie has served on the boards of Penjerdel Corporation;
Pennsylvania Biotechnology Association; the National Pharmaceutical Council,
Inc.; Morristown Memorial Hospital and Wells College. He is currently a
director of First of America Bank Corporation, Kellogg Company and Southwest
Michigan Healthcare Coalition. He began serving as
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<PAGE> 17
a Director of The Upjohn Company in January 1994 and is a member of the
Executive and the Finance Committees of the Board of Directors.
In addition to J. L. Zabriskie, L. S. Smith and J. R. Mitchell, M.D., the
executive officers of the Company, who are elected annually for a one-year
term, are as follows:
<TABLE>
<CAPTION>
First
Year of
Current Offices Held During the
Officers Age Office Past Five Years
-------- --- ------- -------------------------
<S> <C> <C> <C>
K. M. Cyrus . . . . . . . . . 56 1994 Executive Vice President, Secretary and General Counsel. Formerly Senior Vice President,
Secretary and General Counsel; and prior thereto Vice President, Secretary and General
Counsel.
D. R. Parfet . . . . . . . . 42 1991 Executive Vice President for Administration. Formerly Senior Vice President for
Administration.
R. C. Salisbury . . . . . . . 51 1994 Executive Vice President and Chief Financial Officer. Formerly Senior Vice President for
Finance and Chief Financial Officer, and prior thereto Vice President for Finance and
Chief Financial Officer.
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION
BOARD OF DIRECTORS COMPENSATION
Compensation for non-employee members of the Board of Directors consists of
an annual retainer fee of $25,000 plus a $1,000 fee for each Board meeting
attended; a $1,000 fee for attending the first committee meeting held on any
day and a $750 fee for attending subsequent committee meetings held on the same
day. In addition, the chairperson for each committee receives a quarterly
retainer fee of $1,000. Employee directors do not receive compensation for
serving on the Board or on the Board's committees. The Company maintains a
retirement plan for outside directors which provides that a director will
receive retirement benefits for a period of time equal to the length of his
non- employee Board service in an amount equal to 50% of his last annual
retainer after 5 years of non-employee service plus 5% for each additional year
of non-employee Board service up to a total of 100% of his last annual
retainer. The Company also maintains a deferred compensation plan for outside
directors, which enables a director to defer payment of his fees in cash or
stock until he leaves the Board.
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<PAGE> 18
REPORT OF THE COMPENSATION AND INCENTIVE COMMITTEE
The Compensation and Incentive Committee, consisting of five independent
directors, none of whom has ever served as an officer or employee of the
Company or has any known conflicts, is responsible for the establishment and
oversight of executive compensation policies and practices.
COMPENSATION POLICIES
In general, the Company seeks to encourage and reward executive efforts
which create shareholder value through achievement of corporate objectives,
business strategies and performance goals, by blending annual and long-term
cash and equity compensation and, in so doing, to align the interests of
executives with those of shareholders. More specifically, the Committee's
compensation policies can be summarized as:
(a) total executive compensation should be targeted at or near the mean
competitive level of comparable companies (the companies included in the
Combined Standard & Poor's Drug Group Index listed under the caption
Comparison of Cumulative Total Shareholder Return) for competitive
performance, and, similarly, superior performance should be recognized;
(b) incentive-based (at-risk) compensation should range from 30% to 50% of
total compensation, with the higher-ranking executives having a greater
proportion of incentive-based compensation;
(c) with respect to incentive-based (at-risk) compensation, at least 50%
should be based upon external standards of competitive performance rather
than internally established goals; and
(d) equity-based compensation (stock options, restricted stock, performance
shares and deferred incentive compensation) should be used to further
link executive performance to shareholder interests, promote and
encourage stock ownership in the Company and provide an incentive to
create long-term shareholder value.
It is the Committee's belief that a compensation program designed around
these policies will enhance relative to the group of comparable companies the
returns to the Company's shareholders over time. Each component of
compensation (base salary, annual incentive bonus, and long-term equity-based
compensation) is outlined below.
BASE SALARIES
Executive salaries are based on several factors: competitive labor market
position determined from market surveys, level of job responsibility, and
individual performance. Our objective is to ensure our base salary component
is competitive (at a level near the mean/median of comparable companies) and
allows for attracting and retaining key talent. Officer performance ratings
and salary increases are reviewed by the Committee annually.
INCENTIVE-BASED COMPENSATION
Payments under the Company's Incentive Compensation Plan are the "at-risk" or
variable component of annual executive compensation, ranging from 30% to 50% of
total compensation, with senior executives having the highest proportion of
incentive-based compensation.
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<PAGE> 19
In 1994, 50% of targeted incentive compensation was based upon the extent to
which actual corporate earnings before tax ("EBT") met the targeted corporate
EBT levels, and the remaining 50% was determined by the Total Market Return of
the Company's Common Stock relative to the average Total Market Return of
comparable companies which is measured over a 2-year period. Based on these
measurements, executive officers received 101.6% of their 1994 incentive
compensation target awards, reflecting 100.7% achievement of the EBT measure
and 102.4% achievement of the Total Market Return measure.
In 1995, 50% of targeted incentive compensation will continue to be dependent
upon external standards of competitive performance. However, in addition to
the use of Total Market Return, the relative growth in Earnings Before Taxes
was added as an external measurement, each factor weighted equally and measured
against the group of comparable companies. The remaining 50% of targeted
incentive compensation will be determined by the extent that internal
performance measurements established for the Company's core processes (R&D,
Sales & Marketing and Supply) meet their defined 1995 objectives.
LONG-TERM EQUITY-BASED COMPENSATION
The Company's principal equity-based compensation includes voluntary and
mandatory deferred incentive compensation, stock options, performance shares
and restricted stock. In addition, executive officers, like all employees, are
eligible for employer matching contributions paid in stock under the Company's
Employee Savings Plan.
Under the terms of the Incentive Compensation Plan, 20% of the incentive
compensation earned each year must be deferred in shares of Company stock to be
generally paid following the executive's retirement. Premature termination of
employment results in forfeiture of the deferred amounts. In addition, the
remainder of an executive's incentive compensation may be voluntarily deferred
in shares of Company stock.
The Committee grants annual ten-year stock options, having a value based on
the level of stock price appreciation over the market price on the date of
grant. The Committee considers the level of stock options granted by the group
of comparable companies and the number of Upjohn stock options previously
granted in reaching its decision to make additional grants of stock options,
but does not have a specific weighting formula for each factor. The Committee
also makes periodic grants of performance stock options that become exercisable
if the Company's stock price appreciates by certain thresholds over the market
price on the date of the grant.
Performance Shares (which represent a contingent right to receive shares of
the Company's Common Stock if specific long-term performance objectives are
achieved) were first granted in 1994 (with the first payout scheduled for 1996)
as a tool to increase executive equity compensation and to enhance the
executive's focus on the long-term performance of the Company. Performance
Shares will be earned based upon the Company's relative achievement of Total
Market Return, Return on Net Assets and Net Earnings Growth, as compared to the
group of comparable companies.
Restricted stock, which cannot be sold or transferred until earned in future
years and will generally be forfeited if the executive terminates employment
before the shares are earned, is issued on a periodic basis according to the
Committee's assessment of appropriate recognition and retention factors.
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<PAGE> 20
POLICY ON DEDUCTIBILITY OF COMPENSATION
Section 162(m) of the Internal Revenue Code limits to $1 million the
corporate tax deduction for compensation paid to any of the executive officers
listed in the Summary Compensation Table under the caption Executive
Compensation unless certain requirements are met. This provision requires
adherence to non-discretionary, pre-established performance goals. The
Committee believes that the stock options granted to these executive officers
meet the requirements for fully deductible compensation. However, the
Committee believes that it is in the best interests of shareholders and
management to retain some level of discretion in determining awards under the
Incentive Compensation Plan and the Performance Share Plan. The Committee
believes that the benefit derived from the tax deduction is not in proportion
to the Committee's responsible stewardship of the Company's incentive and
performance-based compensation plans. As in the past, the Committee believes
that it is important to be able to review any extraordinary or non-recurring
events affecting the Company's results of operations before determining final
incentive payouts in order to ensure that the efforts of the incentive group
are compensated fairly and appropriately. The result of this decision is the
inability of the Company to deduct executive compensation (except for stock
options) in excess of $1 million. Currently, only J. L. Zabriskie, the
Company's Chief Executive Officer, has compensation in excess of $1 million
that will not be fully deductible.
CHANGE-IN-CONTROL COMPENSATION
The Committee considers the ability to recruit and maintain an outstanding
management team essential to protecting and enhancing the best interests of the
Company and the shareholders. In this connection, and to assure the continued
services and dedication of executive officers in the event of any threatened or
actual change-in-control of the Company, the Committee modified the Company's
existing change-in-control provisions to be competitive with other companies.
The Company has entered into a new severance agreement with each executive
officer providing for the payment of severance benefits sufficient to provide a
cash benefit equal to 2.5 times the officer's annualized salary and incentive
compensation (whether or not deferred) plus the amount of any excise taxes
payable by the officer on such amount in the event his/her employment is
terminated other than for cause, disability or retirement within two years
following a change-in-control of the Company.
CHIEF EXECUTIVE OFFICER COMPENSATION
The annual compensation initially paid to J. L. Zabriskie, who became Chief
Executive Officer of the Company in 1994, was fixed by his employment agreement
and was determined by the Committee to be competitive with the compensation
paid to CEO's of comparable companies and necessary to attract J. L. Zabriskie
to the Company. Under his employment agreement, J. L. Zabriskie's 1994 base
salary was set at $800,000. He also received a bonus of $731,272 (his target
award of $720,000 was applied to the Company's overall performance payout
factor of 101.6%) in February 1995 for services rendered in 1994, approximately
$530,000 of which will not be deductible by the Company under the new Internal
Revenue Code limits. In addition, pursuant to his employment agreement, J. L.
Zabriskie received 15,000 shares of restricted stock to be earned in equal
amounts in January 1995 and January 1996, which amount was later reduced by the
value of a performance share award received from his prior employer to 10,202
shares and which may be subject to further reduction if additional performance
share awards are received from his prior employer. Under his employment
agreement, J. L. Zabriskie was also granted a stock option for 250,000 shares
that became exercisable on January
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<PAGE> 21
3, 1995; a stock option for 50,000 shares that will become exercisable after
January 3, 1996 when the stock price exceeds $34.06; and a stock option for
50,000 shares that will become exercisable after January 3, 1997 when the stock
price exceeds $39.06. All of the stock options have a ten-year term and an
exercise price of $29.06 per share.
Beginning with 1995 compensation, J. L. Zabriskie's salary, incentive
compensation, stock options and performance share awards were determined by the
Committee on the basis of the compensation policies described above. The
Committee evaluates the performance of the CEO at least annually based upon
both the Company's financial performance and the extent to which strategic and
business plan goals are met. The Committee does not assign relative weights or
rankings to each of such factors but instead makes a subjective determination
based upon a consideration of all such factors.
In reviewing the CEO's 1994 performance, the Committee noted J. L.
Zabriskie's significant leadership in creating a vision for growth of the
Company and redefining the Company's core processes. In addition, the
Company's 1994 financial performance met internal goals and exceeded external
expectations in the face of intense generic competition and changing market
conditions. Under the leadership of J. L. Zabriskie, the Company's 1994
accomplishments included further concentration of R&D efforts on high potential
products, restructuring U.S. pharmaceutical sales and marketing operations,
implementation of a specific generic strategy to reduce the impact of key
patent expirations, streamlining of certain manufacturing processes, further
cost reductions throughout the Company, the sale of the agricultural seed
business, acquisition of several product candidates and technology and
expansion of operations in China, Eastern Europe and other promising
international markets.
COMPENSATION AND INCENTIVE COMMITTEE
R. H. Brown F. C. Carlucci D. F. Grisham W. E. LaMothe W. D. Mulholland
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<PAGE> 22
EXECUTIVE COMPENSATION
The following table shows the total compensation received for the last three
calendar years by the Chief Executive Officer and by the next four most highly
compensated executive officers of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ------------------------------------------------
Perfor- Securities All
Restricted mance Under- Other
Stock Share lying Compen-
Base Bonus Awards Awards Options sation
Name and Principal Position Year Salary (1) (2) (3) (# of shares) (4)
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
J. L. Zabriskie, 1994 $800,000 $731,272 $300,321 $286,250 350,000 N/A
Chairman of the Board and
Chief Executive Officer
L. S. Smith, 1994 $480,000 $431,262 $ 0 $152,686 32,000 $4,575
President and Chief 1993 $415,417 $462,408 $ 0 0 40,000 $5,494
Operating Officer 1992 $380,000 $276,115 $166,250 0 40,000 $5,726
J. R. Mitchell, 1994 $414,830 $304,697 $ 0 $152,686 32,000 $4,616
Vice Chairman of the Board 1993 $366,875 $302,830 $ 0 0 40,000 $6,368
and President, Upjohn 1992 $335,000 $203,267 $403,750 0 30,000 $6,621
Laboratories
R. C. Salisbury, 1994 $300,042 $205,514 $ 0 $114,500 24,000 $4,596
Executive Vice President 1993 $275,000 $206,876 $ 0 0 45,000 $6,368
and Chief Financial 1992 $272,083 $159,638 $132,250 0 25,000 $6,621
Officer
D. R. Parfet, 1994 $277,084 $189,928 $ 0 $114,500 24,000 $4,575
Executive Vice President 1993 $266,000 $215,847 $ 0 0 30,000 $6,368
for Administration 1992 $266,000 $169,130 $ 0 0 30,000 $6,621
</TABLE>
---------------
(1) Bonus represents Incentive Compensation Plan awards (20% of which is
deferred and subject to forfeiture if employment is terminated other than
for retirement, death or disability) and any other annual bonuses.
(2) The restricted stock included in the table represents the fair market
value of the entire restricted stock award on the date of grant,
including the value of any supplemental payment in cash or stock that
vests ratably as the restricted stock vests. The restricted stock
included in the table for J. L. Zabriskie is subject to reduction by the
value of any future performance share target awards received by him from
his prior employer. During 1994, 4,798 restricted shares granted to J.
L. Zabriskie were canceled due to his receipt of performance share awards
from his prior employer. The restricted stock granted to J. L. Zabriskie
will remain restricted until May 1996 or such earlier time (but not
before January 1996) that it is determined that no further performance
shares will be received by him from his prior employer. Dividends are
paid on the restricted stock at the same time and at the same rate as
paid to all shareholders. As of December 31, 1994, based on the market
price of the Company's Common Stock on that date of $30.9375, J. L.
Zabriskie held 10,202 shares of restricted stock valued at $315,624; L.
S. Smith held 2,000 shares of restricted stock valued at $61,875 which
will be earned in 1995; J. R. Mitchell held 6,800 shares of restricted
stock valued at $210,375, which will be earned at the rate of 18% in 1995
and 1996, 24% in 1997 and 40% in 1998; and R. C. Salisbury held 1,600
shares of restricted stock valued at $49,500 which will be earned in
1995.
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<PAGE> 23
(3) The Performance Shares included in the table represent the fair market
value of the number of shares of the Company's Common Stock on the date
of grant that will be earned by the recipient over two-year and
three-year performance cycles. Dividend equivalents are credited on the
Performance Shares at the same time and at the same rate as regular
dividends are paid to shareholders. As of December 31, 1994, based on
the market price of the Company's Common Stock on that date of $30.9375,
J. L. Zabriskie held 10,000 performance shares valued at $309,375; L. S.
Smith held 5,334 performance shares valued at $165,020; J. R. Mitchell
held 5,334 performance shares valued at $165,020; R. C. Salisbury held
4,000 performance shares valued at $123,750; and D. R. Parfet held 4,000
performance shares valued at $123,750.
(4) All other compensation represents the Company match under The Upjohn
Employee Savings Plan.
STOCK OPTION GRANTS
The following table shows the number and percentage of stock options granted
to the named executive officers during 1994, the exercise price and expiration
date of the options and the potential realizable value of each grant assuming
that the market price of the stock appreciates in value from the date of grant
to the expiration date at assumed annualized 5% and 10% rates. The Company is
unable to predict or estimate the Company's actual future stock price or place
a reasonably accurate present value on the options granted.
ORIGINAL STOCK OPTION GRANTS IN LAST FISCAL YEAR (1)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
-------------------------------------------------------------------------------- --------------------------
Number of
Securities % of Total
Under- Options
lying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted Fiscal Year ($/Sh) Date 5%($) 10%($)
---- ------- ----------- ------ ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
J. L. Zabriskie . . . . 350,000 18.2% 29.0625 1/3/04 6,397,000 16,211,300
L. S. Smith . . . . . . 32,000 1.66% 28.625 2/15/04 576,100 1,459,900
J. R. Mitchell . . . . 32,000 1.66% 28.625 2/15/04 576,100 1,459,900
D. R. Parfet . . . . . 24,000 1.24% 28.625 2/15/04 432,100 1,094,900
R. C. Salisbury(2) . . 24,000 1.24% 28.625 2/15/04 432,100 1,094,900
</TABLE>
---------------
(1) Options can be exercised in full after one year of employment from the
date of grant with payment in either cash or shares of the Company's
Common Stock. Upon a stock-for-stock exercise, the optionee will receive
a new, non-qualified reloaded stock option at the then current market
price for the number of shares tendered to exercise the option. The
reloaded stock option will have an exercise term equal to the remaining
term of the exercised option. Options may only be exercised during
employment or within three months after employment ceases, except that
following retirement at or after age 65 or other approved termination of
employment, stock options may be exercised for periods up to five years
(but not beyond the original expiration date of the option).
-21-
<PAGE> 24
(2) In addition to the original stock option grant shown above, R. C.
Salisbury received a "reloaded" stock option in 1994 at the then current
market price of $35.31 for the 7,544 shares tendered by him in a
stock-for-stock option exercise during the year. The "reloaded" stock
option for 7,544 shares will have an expiration date of February 16, 2003
and a potential realizable value of $146,852 assuming that the market
price of the stock appreciates in value from the date of receipt to the
expiration date at an assumed annualized 5% rate and $361,697 at an
assumed annualized 10% rate.
STOCK OPTION EXERCISES
The following table shows the number of stock options exercised and the value
realized by the named executive officers during 1994 and the number of
unexercised stock options remaining at year end and the potential value thereof
based on the year-end market price of the Company's Common Stock of $30.9375:
AGGREGATED STOCK OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
FY-End (#) FY-End ($)
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
---- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
J. L. Zabriskie . . . . . . . . . . 0 0 0/350,000 $ 0/656,250
L. S. Smith . . . . . . . . . . . . 0 0 185,250/32,000 $ 110,656/74,000
J. R. Mitchell . . . . . . . . . . 0 0 116,000/32,000 $ 111,562/74,000
D. R. Parfet . . . . . . . . . . . 1,950 $37,376 136,350/24,000 $ 96,150/55,500
R. C. Salisbury . . . . . . . . . . 10,401 $89,169 100,953/31,544 $ 69,086/55,500
</TABLE>
PERFORMANCE SHARE AWARDS
The following table shows the number of Performance Shares granted to the
named executive officers during 1994, the performance period over which the
Performance Shares will be earned and minimum, target and maximum payouts of
the Performance Share grants. Performance Shares represent a contingent right
to receive shares of the Company's Common Stock if specific long-term
performance objectives are achieved. Performance Shares will be earned based
upon the Company's relative achievement of Total Market Return, Return on Net
Assets and Net Earnings Growth, as compared to the group of comparable
companies. If minimum objectives are not met, there will be no distributions.
-22-
<PAGE> 25
LONG-TERM INCENTIVE PLAN - PERFORMANCE SHARE AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Estimated Future Payouts
-------------------------------------
Number of
Performance Performance Threshold Target Maximum
Name Shares Period (#)(1) (#)(2) (#)(3)
---- ---------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
J. L. Zabriskie . . . . . . 5,000 1994 and 1995 683.5 5,000 10,000
5,000 1994-1996 1000.0 5,000 10,000
L. S. Smith . . . . . . . . 2,667 1994 and 1995 364.5 2,667 5,334
2,667 1994-1996 533.4 2,667 5,334
J. R. Mitchell . . . . . . 2,667 1994 and 1995 364.5 2,667 5,334
2,667 1994-1996 533.4 2,667 5,334
D. R. Parfet . . . . . . . 2,000 1994 and 1995 273.4 2,000 4,000
2,000 1994-1996 400.0 2,000 4,000
R. C. Salisbury . . . . . . 2,000 1994 and 1995 273.4 2,000 4,000
2,000 1994-1996 400.0 2,000 4,000
</TABLE>
---------------
(1) Threshold represents the minimum amount payable if any payout is
achieved.
(2) Target represents the amount payable if the specified performance
criteria are exactly achieved.
(3) Maximum represents the maximum amount payable under the terms of the
Performance Share Plan.
COMPARISON OF CUMULATIVE TOTAL SHAREHOLDER RETURN
The following graphs compare the yearly change over the last five years and,
for a longer-term perspective, over the last ten years, in the Company's
cumulative total shareholder return (stock price appreciation plus the
cumulative value of reinvested dividends) compared to the Standard & Poor's 500
Stock Index and a Combined Standard & Poor's Drug Group Index consisting of
Abbott Laboratories; American Home Products Corporation; Bristol-Myers Squibb
Company; Johnson & Johnson; Eli Lilly and Company; Merck & Co., Inc.; Pfizer
Inc.; Schering-Plough Corporation; The Upjohn Company and Warner Lambert
Company. Under this peer group index, the returns of each component company
are weighted according to their respective stock market capitalization as of
the beginning of each period for which a return is indicated. For 1994, total
shareholder return performance by The Upjohn Company was 111.4% as compared to
113.4% for the Peer Group Index. The graphs assume $100 was invested on
December 31, 1989 (for five-year graph) and December 31, 1984 (for ten-year
graph) and that all dividends were reinvested. The stock performance as shown
on the Performance Graph should not be interpreted as a prediction of future
stock performance.
-23-
<PAGE> 26
5 YEAR TOTAL RETURN
<TABLE>
<CAPTION>
MEASUREMENT PERIOD UPJOHN
(FISCAL YEAR COVERED) COMPANY S&P 500 INDEX PEER GROUP
<S> <C> <C> <C>
1989 100 100 100
1990 101.35 96.89 117.70
1991 112.51 126.42 184.01
1992 93.08 136.05 154.69
1993 86.84 149.76 145.19
1994 96.73 151.74 164.69
</TABLE>
10 YEAR TOTAL RETURN
<TABLE>
<CAPTION>
MEASUREMENT PERIOD UPJOHN
(FISCAL YEAR COVERED) COMPANY S&P 500 INDEX PEER GROUP
<S> <C> <C> <C>
1984 100 100 100
1985 195.94 131.64 147.05
1986 278.72 156.08 202.72
1987 272.76 164.04 219.75
1988 267.79 191.28 250.90
1989 369.03 251.89 353.20
1990 374.02 244.07 415.73
1991 415.20 318.43 649.94
1992 343.51 342.69 546.36
1993 320.48 377.23 512.81
1994 356.96 382.21 581.70
</TABLE>
<PAGE> 27
RETIREMENT BENEFITS
The following table illustrates the estimated annual benefits payable under
the Company's pension plan upon retirement to persons in the specified
remuneration and years-of-service classifications, assuming retirement at the
normal Social Security retirement age and assuming the participant's
remuneration is equivalent to his Final Average Salary under the plan and is
equal to or greater than 150% of his Social Security Covered Compensation. The
amounts shown include additional non-qualified pension benefits, represent
straight-life annuity amounts notwithstanding the availability of joint
survivorship provisions and are not subject to any offset or reduction for
Social Security benefits.
<TABLE>
<CAPTION>
PENSION PLAN TABLE
YEARS OF SERVICE*
------------------------------------------------------------------------------
REMUNERATION 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS 40 YEARS*
------------ -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
$ 500,000 . . . . . . . . $147,000 $196,000 $245,000 $ 295,000 $ 307,000 $ 320,000
$ 700,000 . . . . . . . . $207,000 $276,000 $345,000 $ 415,000 $ 432,000 $ 450,000
$ 900,000 . . . . . . . . $267,000 $356,000 $445,000 $ 535,000 $ 557,000 $ 580,000
$1,100,000 . . . . . . . . $327,000 $436,000 $545,000 $ 655,000 $ 682,000 $ 710,000
$1,300,000 . . . . . . . . $387,000 $517,000 $646,000 $ 775,000 $ 805,000 $ 840,000
$1,500,000 . . . . . . . . $447,000 $573,000 $716,000 $ 859,000 $ 931,000 $ 969,000
$1,700,000 . . . . . . . . $507,000 $679,000 $849,125 $1,019,000 $1,057,000 $1,104,000
-------------------
</TABLE>
* Service in excess of 40 years is not counted under the Company's pension
plan.
The compensation included as remuneration are the amounts listed under
"Annual Compensation" in the Summary Compensation Table shown above. The
current number of years of service credited for the following individuals at
December 31, 1994, were: J. L. Zabriskie, 29 years; L. S. Smith, 36 years;
J. R. Mitchell, 9 years; D. R. Parfet, 17 years; and R. C. Salisbury, 20 years.
As noted below, J. L. Zabriskie's retirement benefit under the Company's plans
will be reduced by the value of his pension from former employment.
EMPLOYMENT AGREEMENTS
Under an agreement made with J. L. Zabriskie when he joined the Company, he
will receive a retirement benefit under the Company's pension plans as if he
had been employed by Upjohn for 28 years plus his actual years of service with
the Company less the value of his pension from former employment.
Under an agreement made with J. R. Mitchell when he joined the Company, he
will receive a retirement benefit equal to that which he would receive if he
were granted 1.67 years of service for each actual year of service under the
Company's pension plans, reduced by the value of the pension to be received by
him from his former employment.
TERMINATION OF EMPLOYMENT ARRANGEMENTS AND CHANGE-IN-CONTROL
The Company has a separation payment plan for eligible individual employee
non-performance terminations, including executive officers, ranging from one
weeks' base pay for employees with three months' service to 31 weeks' base pay
for 30 or more years of service.
The Company has entered into a severance agreement with each executive
officer providing for the payment of severance benefits sufficient to provide a
cash benefit equal to 2.5 times the officer's annualized salary and incentive
compensation (whether or not deferred) plus the value of any excise taxes
payable by the officer on such amount in the event his or her employment is
terminated other than for cause, disability or retirement within two years
following a change-in-control of the Company.
-25-
<PAGE> 28
A change-in-control is defined generally as the acquisition of 33% or more of
the Company's Common Stock or a majority change in the incumbent Board of
Directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Under regulations of the Securities and Exchange Commission, persons who have
power to vote or dispose of shares of the Company, either alone or jointly with
others, are deemed to be beneficial owners of such shares. Because the voting
or dispositive power of certain shares listed in the following table is shared,
the same securities in such cases are listed opposite more than one name in the
table. The total number of shares of Common Stock of the Company listed below
for directors and executive officers as a group eliminates such duplication.
Pursuant to a Schedule 13G filed with the Securities and Exchange Commission
by State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, as Trustee of The Upjohn Employee Savings Plan, the Bank
indicated beneficial ownership equivalent to 7.4% of the Company's outstanding
Common Stock as of December 31, 1994.
Pursuant to a Schedule 13G filed with the Securities and Exchange Commission
by The Capital Group Companies, Inc., 333 South Hope Street, Los Angeles,
California 90071, Capital Research and Management Company, a registered
investment adviser and an operating subsidiary of The Capital Group Companies,
Inc., exercised, as of December 31, 1994, investment discretion, but not voting
power, with respect to 11,435,000 shares, or 6.6% of outstanding shares, of the
Company's Common Stock, which were owned by various institutional investors.
Set forth in the following table are the beneficial holdings as of the close
of business on January 31, 1995 of individual directors and nominees, the five
most highly compensated executive officers for 1994 and all directors and
executive officers as a group.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK BENEFICIALLY OWNED(1)
-----------------------------------------------------------------------
SHARED
SOLE VOTING VOTING OPTIONS
AND/OR AND/OR EXERCISABLE
DISPOSITIVE DISPOSITIVE WITHIN 60 % OF
POWER POWER DAYS CLASS
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard H. Brown(2) 2,238(3) -- -- *
Frank C. Carlucci 8,203(3) -- -- *
M. Kathryn Eickhoff 1,500 -- -- *
Antonio M. Gotto 810(3) -- -- *
Daryl F. Grisham 9,216(3) -- -- *
Lawrence C. Hoff(2) 38,417 -- -- *
Geraldine A. Kenney-Wallace 1,384(3) -- -- *
William E. LaMothe(2) 12,544(3) -- -- *
Jerry R. Mitchell 8,830(4) -- 148,000 *
William D. Mulholland 3,007 -- -- *
Donald R. Parfet(2) 545,610(4) 1,390,166(5)(6) 160,350 1.1
William U. Parfet 501,864(4) 1,308,500(6) 151,176 1.0
Robert C. Salisbury 17,503(4) -- 132,497 *
Ley S. Smith(2) 12,927(4) -- 217,250 *
John L. Zabriskie(2) 36,109 -- 250,000 *
Directors and Executive Officers
as a Group (16 persons)(2) 1,221,436(3)(4) 2,414,666(5)(6) 1,180,508 2.7
</TABLE>
----------------
* Less Than 1%
-26-
<PAGE> 29
(1) Excludes the following share units which were awarded under the Company's
Incentive Compensation Plans but payment of which is deferred: L. C. Hoff,
5,220; J. R. Mitchell, 4,102; D. R. Parfet, 3,391; W. U. Parfet, 648;
R. C. Salisbury, 7,511; L. S. Smith, 6,009; and directors and executive
officers as a group, 42,234.
(2) Excludes 350 shares held by the spouse of R. H. Brown; 10,000 shares held
by the spouse of L. C. Hoff; 770 shares held by the spouse of W. E.
LaMothe; 13,219 shares held by the spouse of D. R. Parfet; 2,200 shares
held by the spouse of L. S. Smith; 100 shares held by the spouse of J. L.
Zabriskie; and 26,639 shares held by the spouses of directors and
executive officers as a group.
(3) Includes the following number of shares representing deferred directors'
fees payable in stock which are held in trust with respect to which the
individual has sole voting power: R. H. Brown, 1,919; F. C. Carlucci,
7,703; A. M. Gotto, 810; D. F. Grisham, 9,116; G. A. Kenney-Wallace,
1,134; and W. E. LaMothe, 10,344.
(4) Includes the following number of shares or share equivalents credited
under The Upjohn Employee Savings Plan with respect to which the
individual has sole voting power: J. R. Mitchell, 830; D. R. Parfet,
2,740; W. U. Parfet, 4,288; R. C. Salisbury, 4,198; L. S. Smith, 1,727;
and directors and executive officers as a group, 19,179.
(5) Includes shares over which D. R. Parfet has sole or shared voting or
dispositive power as a member of the Board of Trustees of The W. E.
Upjohn Unemployment Trustee Corporation, a non-profit corporation which
supports research on economic and social problems related to unemployment.
(6) Includes shares held in trust over which voting and/or dispositive power
is shared in his capacity as trustee under various trusts.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
D. R. Parfet, Executive Vice President for Administration,
and W. U. Parfet, Director, are brothers.
-27-
<PAGE> 30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)1. FINANCIAL STATEMENTS
The following are included in the 1994 Annual Report to
Shareholders (Exhibit 13) and are incorporated by reference into
this Form 10-K pursuant to Item 8:
Report of Independent Accountants.
Consolidated Statements of Earnings--Years ended December 31,
1994, 1993 and 1992.
Consolidated Balance Sheets--December 31, 1994 and 1993.
Consolidated Statements of Shareholders' Equity--Years ended
December 31, 1994, 1993 and 1992.
Consolidated Statements of Cash Flows--Years ended December 31,
1994, 1993 and 1992.
Note U. Segment Operations--Years ended December 31, 1994, 1993
and 1992.
Notes to Consolidated Financial Statements.
(A)2. FINANCIAL STATEMENT SCHEDULES
NOTES:
(1) Schedules are omitted because they are either not required, are
not applicable or because equivalent information has been
included in the financial statements, the notes thereto or
elsewhere herein.
(2) Financial statements of 50 percent-or-less-owned affiliated
persons are omitted because such persons, in the aggregate, do
not constitute a significant subsidiary.
(A)3. EXHIBITS
(3)(i) Restated Certificate of Incorporation of the
Registrant (incorporated by reference to Exhibit
(3)(a) to the Registrant's Form 10-K for the year
ending December 31, 1987).
(3)(ii) By-laws of the Registrant, as amended December 20,
1994.
<PAGE> 31
(4)(a) Loan Agreement between Puerto Rico Industrial,
Medical and Environmental Pollution Control
Facilities Financing Authority and The Upjohn
Company, dated as of December 1, 1983, and Trust
Agreement between Puerto Rico Industrial, Medical
and Environmental Pollution Control Facilities
Financing Authority and The Chase Manhattan Bank
(National Association), Trustee, dated as of
December 1, 1983 (not filed pursuant to Regulation
S-K, Item 601 (b)(4)(iii)(A); the Registrant agrees
to furnish a copy of these documents to the
Securities and Exchange Commission upon request).
(4)(b) Indenture dated as of February 1, 1990, with respect
to debt securities issued by The Upjohn Company
Employee Stock Ownership Trust and 9.79% Amortizing
Notes, Series A, Due February 1, 2004, issued by The
Upjohn Company Employee Stock Ownership Trust and
guaranteed by the Registrant (not filed pursuant to
Regulation S-K, Item 601 (b)(4)(iii)(A); the
Registrant agrees to furnish a copy of these
documents to the Securities and Exchange Commission
upon request).
(4)(c) Rights Agreement dated as of June 17, 1986
(incorporated by reference to Exhibit 4(d) to the
Registrant's Form 8-K dated June 17, 1986), as
amended by First Amendment dated as of March 22,
1989 (incorporated by reference to Exhibit 4 to the
Registrant's Form 8-K dated March 27, 1989).
(4)(d) Certificate of Designation, Preferences and Rights
of Series A Participating Cumulative Preferred Stock
(incorporated by reference to Exhibit 4(a) to the
Registrant's Form 8-K dated June 17, 1986).
(4)(e) Certificate of Designations, Preferences and Rights
of Series B Convertible Perpetual Preferred Stock
(incorporated by reference to Exhibit (4)(f) to the
Registrant's Form 10-K for the year ending December
31, 1989).
(4)(f) Indenture dated as of August 1, 1991 between the
Company and The Bank of New York, as trustee, with
respect to Debt Securities to be issued thereunder
from time to time (not filed pursuant to Regulation
S-K, Item 601(b)(4)(iii)(A); the Registrant agrees
to furnish a copy of these documents to the
Securities and Exchange Commission upon request).
(10)(a) Agreements with J. R. Mitchell relating to
additional pension benefits (incorporated by
reference to Exhibit (10)(e) to the Registrant's
Form 10-K for the year ending December 31, 1988 and
Exhibit (10)(f) to the Registrant's Form 10-K for
the year ending December 31, 1989).
(10)(b) Restricted Stock Agreement with L. S. Smith
(incorporated by reference to Exhibit (10)(q) to the
Registrant's Form 10-K for the year ending December
31, 1990).
(10)(c) Restricted Stock Agreement with J. R. Mitchell
(incorporated by reference to Exhibit (10)(i) to the
Registrant's Form 10-K for the year ending December
31, 1991).
(10)(d) The Upjohn Management Incentive Program of 1992,
consisting of Incentive Compensation Plan, Stock
Option Plan and Performance Share Plan.
(10)(e) Form of Indemnification Agreement entered into with
each Officer and Director (incorporated by reference
to Exhibit (10)(h) to the Registrant's Form 10-K for
the year ending December 31, 1986).
<PAGE> 32
(10)(f) Grantor Trust Agreement with The Chase Manhattan
Bank, N.A. (incorporated by reference to Exhibit
(10)(l) to the Registrant's Form 10-K for the year
ending December 31, 1988).
(10)(g) Form of Severance Agreement Entered into with each
Officer of The Upjohn Company.
(10)(h) The Upjohn Replacement and Deferred Benefit Plan
(incorporated by reference to Exhibit (10)(p) to the
Registrant's Form 10-K for the year ending December
31, 1988).
(10)(i) The Upjohn Directors' Retirement Benefit Plan
(incorporated by reference to Exhibit (10)(o) to the
Registrant's Form 10-K for the year ending December
31, 1989).
(10)(j) Deferred Compensation Plan for Directors
(incorporated by reference to Exhibit (10)(p) to the
Registrant's Form 10-K for the year ending December
31, 1989).
(10)(k) Form of Restricted Stock Agreement with L.S. Smith
(incorporated by reference to Exhibit (10)(t) to the
Registrant's Form 10-K for the year ending December
31, 1992).
(10)(l) Form of Restricted Stock Agreement with K.M. Cyrus
and R.C. Salisbury (incorporated by reference to
Exhibit (10)(w) to the Registrant's Form 10-K for
the year ending December 31, 1992).
(10)(m) Agreement with W. U. Parfet (incorporated by
reference to Exhibit (10)(o) to the Registrant's
Form 10-K for the year ending December 31, 1993).
(10)(n) Employment Agreement with J. L. Zabriskie dated
March 14, 1994 (incorporated by reference to Exhibit
(10)(q) to the Registrant's Form 10-K for the year
ending December 31, 1993) as amended September 26,
1994.
(11)(a) Computation of Earnings Per Share - Primary.
(11)(b) Computation of Earnings Per Share - Fully Diluted.
(12) Computation of Ratio of Earnings to Fixed Charges.
(13) Portions of The Upjohn Company's 1993 Annual Report
to Shareholders.
(21) Subsidiaries of the Registrant.
(23) Consent of Independent Accountants.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of
the year ended December 31, 1994.
<PAGE> 33
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Dated: March 21, 1995
THE UPJOHN COMPANY
(Registrant)
By: J. L. ZABRISKIE
--------------------------
J. L. Zabriskie
Chairman of the Board and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
J. L. ZABRISKIE
---------------------------------------- Chairman of the Board and
J. L. Zabriskie Chief Executive Officer
L. S. SMITH
---------------------------------------- President, Chief Operating
L. S. Smith Officer and Director
R. C. SALISBURY March 21, 1995
---------------------------------------- Executive Vice President
R. C. Salisbury and Chief Financial
Officer; also Principal
Accounting Officer
R. H. BROWN Director
----------------------------------------
R. H. Brown
F. C. CARLUCCI Director
----------------------------------------
F. C. Carlucci
</TABLE>
<PAGE> 34
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
M. K. EICKHOFF Director
----------------------------------------
M. K. Eickhoff
A. M. GOTTO, JR. Director
----------------------------------------
A. M. Gotto, Jr.
D. F. GRISHAM Director
----------------------------------------
D. F. Grisham
L. C. HOFF Director
----------------------------------------
L. C. Hoff
G. A. KENNEY-WALLACE Director
----------------------------------------
G. A. Kenney-Wallace March 21, 1995
W. E. LaMOTHE Director
----------------------------------------
W. E. LaMothe
J. R. MITCHELL Director
----------------------------------------
J. R. Mitchell
W. D. MULHOLLAND Director
----------------------------------------
W. D. Mulholland
Director
----------------------------------------
W. U. Parfet
</TABLE>
<PAGE> 35
EXHIBIT INDEX
Exhibit
No. Description Page
------- ----------- ----
3(ii) By-Laws of the Regisrant
10(d) The Upjohn Management Incentive Program
10(g) Severance Agreement
10(n) Employment Agreement with J.L. Zabriskie
11(a) Computation of Earnings Per Share--Primary
11(b) Computation of Earnings Per Share--Fully Diluted
12 Computation of Ratio of Earnings to Fixed Charges
13 Portions of the Upjohn Company's 1993 Annual Report
to Shareholders
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
27 Financial Data Schedule
<PAGE> 1
Exhibit (3)(ii)
BY-LAWS OF THE UPJOHN COMPANY
A Delaware Corporation
As amended December 20, 1994
Article I - Stock
1. Transfers of stock shall be made only upon the books of the Company,
and before a new certificate is issued the old certificate must be surrendered
for cancellation. The Board of Directors shall fix in advance a date not less
than ten (10) nor more than sixty (60) days preceding the date of any meeting
of shareholders, and a date not less than fifteen (15) nor more than thirty
(30) days preceding the date for payment of any dividend, as the record dates
respectively for the determination of the shareholders entitled to notice of,
and to vote at, any such meeting, or entitled to receive payment of any such
dividend, and only such shareholders of record on the dates so fixed shall be
entitled to such notice of, and to vote at, such meeting, or to receive payment
of such dividend, notwithstanding any transfer of any stock on the books of the
Company or otherwise after any such record date fixed as aforesaid.
Article II - Stockholders
1. The Annual Meeting of the Stockholders of this Company shall be held
on the third Tuesday in April of each year, if not a legal holiday, but if a
legal holiday, then on the day following, or on such other date as shall be set
forth in the Notice of Annual Meeting approved by the Board of Directors and
provided to stockholders.
2. Annual and Special meetings of the stockholders may be held at such
place as may be designated in the County of Kalamazoo.
3. Notice of Meetings, written or printed, for every regular or special
meeting of the stockholders, shall be prepared and mailed to the last known
post office address of each stockholder not less than ten days before any such
meeting, and if for a special meeting, such notice shall state the object or
objects thereof.
4. A quorum at any meeting of the stockholders shall consist of three
persons representing in person or by proxy not less than a majority of the
voting stock of the Company.
5. All elections and all other questions shall be decided by a plurality
of the voting stock represented at the meeting, except as otherwise provided by
statute or the Certificate of Incorporation. The Election of Directors shall
be held at the annual meeting of stockholders
<PAGE> 2
and shall, after the first election, be conducted by two inspectors of election
appointed by the President for that purpose. The election shall be by ballot.
6. The Order of Business at the Annual Meeting, and, as far as possible,
at all other meetings of the stockholders, shall be:
1. Proof of due notice of Meeting and establishment of presence of a
quorum
2. Reading and disposal of any unapproved Minutes
3. Reports of Officers and Committees
4. Election of Directors
5. Unfinished Business
6. New Business
7. Adjournment
Article III - Directors
1. The business and property of the Company shall be managed by a Board
of not less than three nor more than sixteen Directors, with the number fixed
from time to time by resolution of the Board. Any vacancies on the Board and
any newly created directorships resulting from any increase in the number of
Directors shall be filled for the unexpired term solely by the affirmative vote
of a majority of the Directors then in office, even though less than a quorum.
No decrease in the number of Directors shall shorten the term of any incumbent
Director. Directors may receive compensation, if any, for their services in
such amount and under such conditions as the Board may from time to time
determine.
2. The Regular Meetings of the Board shall be held without further notice
in the principal office of the Company in Kalamazoo County on the third Tuesday
of each month, except January, June and August, if not a legal holiday, but if
a legal holiday, then on the day following. A regular meeting shall be held
each year immediately after the Annual Meeting of the stockholders.
3. Special Meetings of the Board may be called at any time by the
Chairman of the Board, the Vice Chairman of the Board, the President, or a
majority of the Board, or may be held at any time and place, without notice, by
unanimous written consent of all the members or the presence of all members at
such a meeting.
4. Notices of Special Meetings shall be given by the Secretary to each
member of the Board not less than 24 hours before such meeting, and need not
state the purpose thereof. Such notice may be given by any usual means of
communication, including but not limited to mail, telephone (subsequently
confirmed in writing), telex, telecopy or any other means of
telecommunications.
<PAGE> 3
5. A majority of the Directors then in office shall constitute a quorum
at any meeting of the Board except upon questions relating to the removal of an
officer. A majority of the members present shall decide any questions that
come before the meeting, except that the removal of an officer shall require
the affirmative vote of a majority of the entire Board.
6. Officers of the Company shall be elected by ballot by the Board at its
first meeting after the election of directors each year. An officer may be
removed at any time by a majority vote of all the directors on due cause shown
at any meeting of the Board, provided that no such removal can be made at such
meeting unless the notice thereof specifies such removal as one of the matters
which will be brought up for consideration at said meeting. If any office
becomes vacant or a new office is created during the year, the Board shall fill
the same for the unexpired term. The Board shall have the power to engage such
employees as it desires, and to fix the compensation of the officers and
employees of the Company, or it may delegate these powers to individuals if it
desires.
7. The order of business at any regular or special meeting of the Board of
Directors shall be:
1. Reading and disposal of any unapproved Minutes
2. Reports of Officers and Committees
3. Election of Officers (when applicable)
4. Unfinished Business
5. New Business
6. Adjournment
Article IV - Officers
1. The officers of the Company shall be a Chairman of the Board, a Vice
Chairman of the Board, a President, one or more Vice Presidents, a Treasurer
and a Secretary. The Board may also designate Assistant Secretaries and
Assistant Treasurers. The Chairman of the Board, the Vice Chairman of the
Board and the President shall be directors. No other officers need to be
directors. The number of Vice Presidents shall be determined by the Board.
The officers shall be elected annually, and shall hold office until their
successors are elected and qualify. The Board shall designate one of the
foregoing as the chief executive officer and may confer upon him an appropriate
title.
2. Each officer shall perform the duties and exercise the powers usually
incident to his office and such other duties as may be assigned to him by the
Board.
Article V - Dividends and Finance
<PAGE> 4
1. Dividends shall be declared only from the surplus profits at such
times as the Board shall direct, and no dividend shall be declared that will
impair the capital of the Company.
2. The Moneys of the Company shall be deposited in the name of the
Company in such bank or banks as the Board shall designate, and shall be drawn
out only by check signed by such person or persons as the Board may designate.
Article VI - Seal
1. The Corporate Seal of the Company shall consist of two concentric
circles, between which shall be the name of the Company, and in the center of
which shall be inscribed the words, "Corporate Seal Delaware" and such seal, as
impressed on the margin hereof, is hereby adopted as the Corporate Seal of the
Company.
Article VII - Amendments
1. These By-Laws may be amended, repealed or altered, in whole or in
part, by a majority vote of the entire outstanding stock of the Company, at any
regular meeting of the stockholders, or at any special meeting where such
action has been announced in the call and notice of such meeting.
2. The Board of Directors may amend the By-Laws but shall not repeal any
By-Laws made by the stockholders of this Company.
<PAGE> 1
Exhibit (10)(d)
THE UPJOHN MANAGEMENT INCENTIVE PROGRAM OF 1992
1. Purposes
The purposes of the Program are (a) to provide additional incentives and
rewards to executives and key personnel who contribute to the success of the
Company and its Subsidiaries by their invention, ability, industry, loyalty or
exceptional service, through making them participants in that success; (b) to
attract to and retain in the employ of the Company and its Subsidiaries,
individuals of outstanding competence; and (c) to encourage the ownership by
such individuals of stock of the Company or otherwise further the identity of
their interests with those of the Company's stockholders generally. The
Program is composed of the Incentive Compensation Plan of 1992, the 1992 Stock
Option Plan and the 1992 Performance Share Plan.
<PAGE> 2
2. Definitions
Unless otherwise required by the context, the terms used in the Program
shall have the meanings set forth in this Section 2.
2.01 ADJUSTED EARNINGS BEFORE TAX: The Earnings Before Tax of the
Company for a Compensation Year before deduction of any provision for incentive
compensation awards and as adjusted on or before December 31 of such
Compensation Year for such extraordinary or non-recurring items as the Board of
Directors determines in its discretion are necessary to properly reflect the
efforts of the Incentive Compensation Group.
2.02 AGGREGATE TARGET FUND: The sum of the Target Awards for each member
of the Incentive Compensation Group.
2.03 AWARD: An Incentive Compensation Award, Performance Share Award, or
both, as the context indicates.
2.04 AWARD PERIOD: A number of Compensation Years, not less than two
(2), specified by the Incentive Committee, with respect to corporate officers,
and by the Chief Executive Officer, with respect to all other eligible
Participants, with respect to a Performance Share Award. Award Periods may run
consecutively or concurrently, in whole or in part.
<PAGE> 3
2.05 BASIC PORTION: The portion of an Incentive Compensation Award that
is calculated and paid in accordance with the provisions of Sections 6.04 and
6.06 below.
2.06 BENEFICIARY: As applied to a Participant, a person or entity
(including a trust or the estate of the Participant) designated pursuant to
rules of general application adopted by the Incentive Committee, in a written
document executed by the Participant in such form as shall be approved by the
Incentive Committee, to receive, in the event of the death of the Participant,
the unpaid balance of an Incentive Compensation Award, Options or Stock
Appreciation Rights, or a Performance Share Award. If, at the time when an
unpaid balance of an Incentive Compensation Award or Performance Share Award
shall be or become payable, or an Option or Stock Appreciation Right shall be
exercisable, at or after the death of the Participant, there shall not be any
living person or any entity in existence so designated, the term "Beneficiary"
shall mean the Participant's personal representative.
2.07 BOARD or BOARD OF DIRECTORS: The Board of Directors of the Company.
2.08 COMMON STOCK: The common stock of the Company, par value $1.00 per
share, or such other class of shares or other securities as may be applicable
pursuant to the provisions of Section 4 below.
<PAGE> 4
2.09 COMPANY: The Upjohn Company, a Delaware corporation.
2.10 COMPENSATION YEAR: A calendar year for which the Program is in
effect.
2.11 DEFERRED PORTION: The portion of an Incentive Compensation Award
that is calculated and paid in accordance with the provisions of Sections 6.05
and 6.06 below.
2.12 DISABILITY: A condition that causes a Participant to become
permanently and totally disabled and unable to perform his assigned duties as
determined by a physician designated by the Company.
2.13 DIVIDEND EQUIVALENT:
(a) As applied to a Participant who has elected to receive payment
of the unpaid portion of an Incentive Compensation Award in, or measured by the
value of, shares of Common Stock, or as applied to a Participant who has been
credited with the Deferred Portion of an Incentive Compensation Award pursuant
to the provisions of Section 6.03(c) below, an amount equal to each dividend,
other than a dividend in Common Stock, that would have been received by the
Participant in respect of shares of the Common Stock (giving effect to any
adjustments under Section 4 below) in which such unpaid portion of his Award
shall at the time be payable or by the value of
<PAGE> 5
which payment of such unpaid portion shall be measured, if such shares of
Common Stock had been transferred to such Participant on the date on which the
Award was made and had been retained by him up to and including the record date
for payment of such dividend.
(b) As applied to the recipient of a Performance Share Award, an
amount equal to each dividend, other than a dividend payable in Common Stock,
that would have been received by the recipient in respect of the number of
Performance Shares subject to such Performance Share Award (giving effect to
any adjustment pursuant to Section 4 above) if Shares had been transferred to
such recipient on the date on which such Performance Share Award was granted
and had been retained by such recipient up to and including the record date for
payment of such dividend.
2.14 EARNINGS BEFORE TAX OF THE COMPANY: The consolidated earnings
before tax of the Company for a Compensation Year, as reported in the audited
consolidated annual statement of earnings for such Compensation Year.
2.15 ELIGIBLE EMPLOYEE: An officer of the Company or other salaried
Employee, including a director who is such an officer or salaried Employee.
2.16 EMPLOYEE: An individual employed by the Company or a Subsidiary.
<PAGE> 6
2.17 FAIR MARKET VALUE: As applied to a specific date, the average of
the highest and lowest quoted selling prices of Common Stock on sales, regular
way, reported for such date for New York Stock Exchange issues on the
consolidated stock exchange network or, if Common Stock was not traded on such
date, on the next preceding day on which the Common Stock was so traded.
2.18 INCENTIVE COMMITTEE: The Incentive Committee appointed pursuant to
the provisions of Section 3 below to administer the Program.
2.19 INCENTIVE COMPENSATION AWARD: An award of incentive compensation
granted from time to time under the Program.
2.20 INCENTIVE COMPENSATION GROUP: As applied to a Compensation Year,
the Employees who are corporate officers selected by the Incentive Committee,
and by the Chief Executive Officer with respect to all other eligible
Employees, for such Compensation Year pursuant to the provisions of Section
6.02 below.
2.21 INCENTIVE STOCK OPTION: A form of Option that meets all of the
requirements set forth under Section 422(b) of the Internal Revenue Code of
1986, as amended from time to time, or any successor provision.
<PAGE> 7
2.22 MAXIMUM INCENTIVE COMPENSATION: The maximum amount available for
incentive compensation awards for a particular Compensation Year as determined
by the Board of Directors on recommendation of the Incentive Committee,
composed of the Aggregate Target Fund, as adjusted, and the Supplemental Fund.
In no event shall Maximum Incentive Compensation for any Compensation Year
exceed the smallest of:
(i) five percent (5%) of the amount, if any, by which the
Adjusted Earnings Before Tax of the Company exceeds 15% of Shareholders' Equity
(consolidated total assets less consolidated total liabilities) as reported in
the audited consolidated balance sheet of the Company as of December 31 of the
preceding Compensation Year;
(ii) the total amount of Common Stock dividends paid during
such Compensation Year; or
(iii) three percent (3%) of Earnings Before Tax of the
Company.
2.23 OPTIONS: The options granted from time to time under the Program.
2.24 PARTICIPANT: An Employee to whom an Incentive Compensation Award,
Option, Stock Appreciation Right or Performance Share Award has been granted
under the Program.
<PAGE> 8
2.25 PERFORMANCE SHARE: One share of Common Stock subject to a
Performance Share Award, as adjusted pursuant to Section 4 below.
2.26 PERFORMANCE SHARE AWARD: An award of a right to receive a specified
number of Performance Shares, or cash in respect thereof, as provided in
Section 8.05 below, which right shall be contingent upon and shall vest only to
the extent that the Vesting Criteria applicable to such award are satisfied.
2.27 PROGRAM: The Upjohn Management Incentive Program of 1992 set forth
in these pages, as it may be amended from time to time.
2.28 RESTRICTED SHARES: Shares of Common Stock transferred subject to
restrictions precluding a sale or other disposition for a period of time and
requiring, as a condition to retention, compliance with any other terms and
conditions imposed by the Incentive Committee.
2.29 RETIREMENT: Termination of employment at or after attainment of age
sixty five (65).
2.30 SALARY: The total compensation currently paid to an Employee by the
Company and its Subsidiaries and designated "salary" and in any event exclusive
of any special bonuses, of Incentive Compensation Awards under the Program, of
any
<PAGE> 9
payments to or for the account of the Employee under any pension, excess
benefit, profit-sharing or thrift or savings plan, and of fringe benefits.
2.31 SERVICE: Employment as a regular Employee of the Company or a
Subsidiary. Service shall not be considered to have been terminated by
disability, whether temporary or permanent, during any period that the
Participant shall be entitled to receive at least one-half the salary paid to
him immediately prior to his disability. A Participant who is rendering
advisory services at a salary of less than one-half (1/2) of the salary that he
was being paid as a full-time Employee of the Company or a Subsidiary shall be
considered to have terminated his service.
2.32 STOCK APPRECIATION RIGHT: A right to receive a number of shares of
Common Stock, or cash in lieu thereof, based upon the increase in value of
Common Stock, as more particularly set forth in Section 7.08 below.
2.33 SUBSIDIARY: A corporation the financial results of which for the
Compensation Year are consolidated with those of the Company for purposes of
the financial statement of consolidated earnings for such Compensation Year
included in the Company's annual report to stockholders.
<PAGE> 10
2.34 SUPPLEMENTAL FUND: An amount equal to the excess, if any, of
Maximum Incentive Compensation over the Aggregate Target Fund, as such fund may
be adjusted pursuant to Section 6.01(a) below.
2.35 TARGET AWARD: An amount established by the Incentive Committee,
with respect to corporate officers, and by the Chief Executive Officer, with
respect to all other eligible Participants, for each member of the Incentive
Compensation Group.
2.36 VESTING CRITERIA: Financial or strategic performance goals adopted
by the Incentive Committee, with respect to corporate officers, and by the
Chief Executive Officer, with respect to all other eligible Participants, at
the beginning of an Award Period for the purpose of determining, at the
conclusion of the Award Period, what portion of the Performance Share Award
shall vest and become distributable.
<PAGE> 11
3. Administration
3.01 The Program shall be administered with respect to corporate
officers by an Incentive Committee appointed by the Board of Directors from
among its number, one of whose members shall be designated Chairman by the
Board. The Program shall be administered by the Chief Executive Officer of the
Company with respect to all Employees other than corporate officers of the
Company, except that any unusual items or actions that are substantially
different from prior practice shall be discussed with the Incentive Committee
in advance. No person appointed to the Incentive Committee shall be eligible
for an Incentive Compensation Award or for the grant of an Option or Stock
Appreciation Right or Performance Share Award while serving on the Incentive
Committee and no person shall be appointed to or shall serve as a member of the
Incentive Committee unless at the time of such appointment and service he shall
be a "disinterested person," as defined in Rule 16b-3 of the General Rules and
Regulations under the Securities Exchange Act of 1934 as at such time in effect
or any other provision that may replace such Rule and be in effect at such
time.
3.02 The Incentive Committee shall consist of not less than three (3)
members, and its number may from time to time be increased or reduced (to not
less than three (3)) in the discretion of the Board of Directors.
<PAGE> 12
3.03 At all meetings of the Incentive Committee, a majority of all the
members of the Incentive Committee shall be necessary and sufficient to
constitute a quorum. Only members of the Incentive Committee shall be entitled
to vote, and each such member shall be entitled to one vote. Any action taken
or recommendation made by the Incentive Committee shall require the affirmative
vote of a majority of all the members of the Incentive Committee. The
Incentive Committee may act or recommend by written determination instead of by
affirmative vote at a meeting, provided that any written determination shall be
signed by a majority of all the members of the Incentive Committee, and any
such written determination shall be as fully effective as a majority vote at a
meeting.
3.04 The Incentive Committee may establish and from time to time amend
rules and regulations of general application for the administration of the
Program, subject to the provisions thereof. The Company shall pay such
compensation, if any, for the services of the members of the Incentive
Committee and such of their expenses, if any, and any other expenses of the
Program as the Board of Directors may from time to time approve. The Incentive
Committee may employ counsel whose reasonable compensation and expenses shall
be paid by the Company.
3.05 The Incentive Committee shall keep an accurate and complete record
of its proceedings. Subject to the provisions
<PAGE> 13
of the Program, it shall conduct its business and hold its meetings as
determined by it from time to time, and shall adopt, and may from time to time
amend, its own rules of procedure. The Incentive Committee may elect a
secretary and such assistant secretaries as it shall deem necessary who may,
but need not, be members of the Incentive Committee.
3.06 The Incentive Committee shall have full power and discretion to
administer, construe and interpret the Program. In addition, the Chief
Executive Officer of the Company shall have full power and discretion to
administer, construe and interpret the Program, consistent with the Incentive
Committee's actions, with respect to all Participants except corporate
officers. Any action taken or decision made under the respective provisions of
the Program by the Company, the Board of Directors, the Incentive Committee or
the Chief Executive Officer, arising out of or in connection with the
administration, construction, interpretation or effect of the Program, or
recommendations in accordance therewith, or of any rules and regulations
adopted thereunder, shall in each case lie within its discretion and shall be
conclusive and binding on the Company and its stockholders and on all members
of the Incentive Compensation Group, all Participants and Beneficiaries, all
holders of Options, Stock Appreciation Rights and Performance Share Awards and
all persons claiming under or through any of them.
<PAGE> 14
3.07 In the administration of the Program, the Incentive Committee (for
corporate officers) or the Chief Executive Officer (for all Participants except
corporate officers) may, with respect to the unpaid portion of any Award under
the Program, accelerate payment of such unpaid portion in the case of the death
or Disability of a Participant or, in the case of an Employee who is not a
member of the Board of Directors, of unforeseen circumstances deemed by the
Incentive Committee (for corporate officers) or the Chief Executive Officer
(for all Participants except corporate officers) in the reasonable exercise of
its discretion to constitute hardship.
3.08 The Board of Directors, the Incentive Committee and the Chief
Executive Officer may rely upon any information supplied to them by any officer
of the Company or by the Company's independent public accountants and may rely
upon the advice of such accountants and of counsel, and shall be fully
protected in relying upon any such information and advice. The Chief Executive
Officer of the Company shall on invitation attend all meetings of the Incentive
Committee, but, unless eligible and appointed and serving as a member of the
Incentive Committee, shall have no vote.
3.09 To the full extent permitted by law, no member of the Board of
Directors or of the Incentive Committee shall be liable for any act or failure
to act of any other member of such Board or Incentive Committee, as the case
may be, or of
<PAGE> 15
any officer, agent or employee, and no member of the Board of Directors or of
the Incentive Committee shall be liable for any act, or failure to act, of his
own unless such act or failure to act shall have been in bad faith or grossly
negligent.
3.10 The fact that a member of the Board of Directors shall at the time
be, or shall theretofore have been or thereafter may be, a Participant or
person who has received or is eligible to receive an Incentive Compensation
Award or an Option or Stock Appreciation Right or Performance Share Award shall
not disqualify him from taking part in and voting at any time as a member of
the Board of Directors in favor of or against any amendment or repeal of the
Program, provided that such action by the Board shall be only in accordance
with the recommendations of the Incentive Committee as provided in Section 10
below.
<PAGE> 16
4. Adjustments Upon Changes in Capitalization
In the event of a reorganization, recapitalization, stock split, stock
dividend, combination of shares, merger, consolidation, rights offering or any
other change in the corporate structure of the Company affecting shares of its
Common Stock, the Incentive Committee shall recommend and the Board of
Directors shall make appropriate adjustment (a) in respect of the unpaid
balance of any Incentive Compensation Award payable in or measured by the value
of shares of Common Stock, (b) in respect of any Restricted Shares or
Performance Share Awards authorized, transferred or granted under the Program
and (c) in the number and kind of shares authorized by the 1992 Stock Option
Plan, in the aggregate and to any individual Employee or group of Employees, in
the number and kind of shares subject to unexercised Options and Stock
Appreciation Rights theretofore granted and in the purchase price of such
shares.
<PAGE> 17
5. Term of the Program
Grants of Performance Share Awards or Incentive Compensation Awards may be
made under the Program for each of the five (5) calendar years 1992 through
1996, both inclusive, or any portion thereof, and Options and Stock
Appreciation Rights may be granted under the Program at any time or from time
to time during each of such five (5) years. Unless the Program shall be
extended or readopted by the stockholders of the Company, no Incentive
Compensation Awards shall be made under the Program for any calendar year
subsequent to 1996 and no Options or Stock Appreciation Rights or Performance
Share Awards shall be granted after December 31, 1996; provided, that the
Incentive Committee may establish, with respect to Performance Share Awards, an
Award Period that includes Compensation Years beginning after December 31,
1996, if the earliest Compensation Year in such Award Period ends no later than
December 31, 1996.
<PAGE> 18
6. The Incentive Compensation Plan of 1992
6.01 Determinations by Incentive Committee and Auditors
(a) Prior to each Compensation Year, the Incentive Committee, with
respect to corporate officers, and the Chief Executive Officer, with respect to
all other eligible Participants, shall select the Incentive Compensation Group
in accordance with Section 6.02 below and shall establish the Target Award or
other basis of participation for each member of the Incentive Compensation
Group. In addition, the Incentive Committee, with respect to corporate
officers, and the Chief Executive Officer, with respect to all other eligible
Participants, may adopt corporate or business performance objectives that may
be used as the basis for adjusting Participants' Target Awards.
(b) At any time after the end of the Compensation Year, the
Incentive Committee, with respect to corporate officers, and the Chief
Executive Officer, with respect to all other eligible Participants, may select
one or more members of the Incentive Compensation Group determined to have made
an extraordinary contribution to the Company during the Compensation Year, and
may award to such members a payment from the Supplemental Fund. Payment of
each award from the Supplemental Fund shall be made at the same time and in the
same manner as the recipient's Target Award for the Compensation Year, and
shall be subject to the elections made by such Participant with respect to the
Incentive Compensation Award of such Participant for such Compensation Year. A
Participant's Incentive
<PAGE> 19
Compensation Award under the Program for any Compensation Year shall consist of
such Participant's Target Award plus such Participant's award, if any, from the
Supplemental Fund.
(c) As soon as practicable after the end of each Compensation
Year, the independent accounting firm employed by the Company as its auditors
shall determine and report the results of operations and financial condition of
the Company for such Compensation Year, and on the basis thereof, relative to
objectives that may have been adopted by the Incentive Committee prior to such
Compensation Year, the Incentive Committee shall determine the Maximum
Incentive Compensation. The determination and report of such auditors for
purposes of this Section 6.01 may be amended by such auditors within a period
of two (2) weeks after its submission to the Board of Directors, but after such
two (2) week period shall be in all respects final and conclusive, for purposes
of determining the Maximum Incentive Compensation, on the Company and its
stockholders, the Incentive Committee, the members at any time of the Incentive
Compensation Group, the Participants and their Beneficiaries, and all others
who may be eligible for Incentive Compensation Awards or to whom Incentive
Compensation Awards may be made or who may be claiming benefits under the
Program or otherwise, and, without limiting the generality of the foregoing,
shall remain final and conclusive for such purposes for such Compensation Year
irrespective of any subsequently discovered miscalculation or error or other
subsequent adjustments and irrespective of the results of any subsequent
<PAGE> 20
audit or review by the Commissioner of Internal Revenue, or by any other agency
or tribunal, affecting any item of Earnings Before Tax of the Company or
Adjusted Earnings Before Tax of the Company.
(d) Such report by the Company's auditors of results of operations
and financial condition of the Company for the Compensation Year for the
purposes of determining Maximum Incentive Compensation shall be directed to the
Board of Directors, and the Chief Financial Officer of the Company shall
promptly transmit a copy to the Incentive Committee.
6.02 Incentive Compensation Group
(a) The Incentive Compensation Group for any Compensation Year
shall consist of such Employees of the Company and its Subsidiaries, including
officers, division heads and other executives, as the Incentive Committee, with
respect to corporate officers, and the Chief Executive Officer, with respect to
all other eligible Participants, may select for such Compensation Year in the
manner hereinafter provided.
(b) An Employee shall be eligible for selection as a member of the
Incentive Compensation Group for a Compensation Year only if employed by the
Company or a Subsidiary at the beginning of such Compensation Year and only if
he shall meet such standards (which may differ with respect to Employees in
different countries or locations) as the Board of Directors may from time to
time determine, but qualification by such standards shall not in itself entitle
an Employee to membership
<PAGE> 21
in the Incentive Compensation Group. A change in the standards qualifying an
Employee for the Incentive Compensation Group, made by the Board of Directors
during a Compensation Year, shall not be made applicable to the Incentive
Compensation Group for such Compensation Year but shall be applicable only with
respect to a succeeding Compensation Year or Years.
(c) A person who is compensated on the basis of fee or retainer, as
distinguished from Salary, shall not be eligible for membership in the
Incentive Compensation Group while so compensated.
(d) No member of the Incentive Committee shall, while serving on
the Incentive Committee, be eligible for membership in the Incentive
Compensation Group.
(e) A member of the Board of Directors or any committee thereof,
or of the board of directors or any committee thereof of a Subsidiary of the
Company, shall not be eligible for membership in the Incentive Compensation
Group unless he is also an Employee but, if an Employee, he shall not be
ineligible because he is such a director or, except as provided in Section
6.02(d) above, because he is a member of any committee.
(f) Notwithstanding any other provision hereof, the Incentive
Committee may at any time resolve that the selection of Employees for
membership in the Incentive Compensation Group and the establishment of their
Target Awards that could be made by the Chief Executive Officer shall be made
by the Incentive Committee instead.
<PAGE> 22
6.03 Incentive Compensation Awards
(a) As promptly as practicable after receiving notice, pursuant to
Section 6.01(d) above, of the results of the operations and financial condition
of the Company for a Compensation Year, the Incentive Committee, with respect
to corporate officers, and the Chief Executive Officer, with respect to all
other eligible Participants, shall make Incentive Compensation Awards for such
Compensation Year pursuant to Sections 6.01 and 6.02. Such Awards shall in no
event exceed in aggregate amount the Maximum Incentive Compensation for such
Compensation Year.
(b) If the employment of a member of the Incentive Compensation
Group shall have terminated during a Compensation Year for any reason,
excepting (i) termination by the Company or a Subsidiary for cause; (ii)
termination by the member for the purpose of assuming employment with a
competitor of the Company or a Subsidiary; or (iii) termination during the
Compensation Year following a "change in control" (as defined in Section 7.09
below), he, or, in the event of his death, such person or persons as the
Incentive Committee may in its discretion select may (but need not) be granted
such Award, if any (but not exceeding the total amount such member would have
received if employed throughout the entire Compensation Year), and on such
basis as the Incentive Committee may in its discretion determine. Such
determination shall be made and reported to the Board of Directors of the
Company prior to the end of such Compensation Year (or as soon as practicable
<PAGE> 23
thereafter). Any member who is terminated by the Company or a Subsidiary for
cause or who terminates for the purpose of assuming employment with a
competitor of the Company or a Subsidiary shall receive no payment or Award
with respect to the Compensation Year in which he terminates. In the event the
employment of a member of the Incentive Compensation Group shall terminate
during the Compensation Year following a "change in control" (as defined in
Section 7.09 below), notwithstanding any other provisions of the Program, the
award to or for such member shall be an amount equal to that portion of his
Target Award determined by multiplying his Target Award by the fraction
determined by dividing the number of days elapsed since the beginning of the
Compensation Year until his date of termination by 365. The reduction of an
Incentive Compensation Award for a Compensation Year as the result of the
termination of employment of a member of the Incentive Compensation Group shall
reduce the Company's obligation in respect of total Incentive Compensation
Awards for such Compensation Year and shall neither increase nor reduce the
Awards for such Compensation Year to other members of the Incentive
Compensation Group.
(c) Each Incentive Compensation Award shall consist of two parts:
the Basic Portion (which shall represent eighty percent (80%) of the total
Award, including any Award from the Supplemental Fund), and the Deferred
Portion (which shall represent twenty percent (20%) of the total Award,
including any Award from the Supplemental Fund). The provi-
<PAGE> 24
sions of Section 6.04 below shall apply only to the Basic Portion, and the
provisions of Section 6.05 below shall apply only to the Deferred Portion, of
each Incentive Compensation Award.
6.04 Time and Form of Payment of the Basic Portion of an Award
(a) Subject to the subsequent provisions of this Section 6.04, the
Basic Portion of each Incentive Compensation Award shall be paid in cash in
full as soon as practicable after the Award shall have been made.
(b) In the event that a member of the Incentive Compensation Group
in respect of a Compensation Year shall have so elected, in accordance with the
provisions of Section 6.04(c) below, with respect to the Basic Portion of an
Incentive Compensation Award that may be made to him for such Compensation
Year, the amount of the Basic Portion of an Award for such Compensation Year
that is subject to election under Section 6.04(c) below shall, subject to the
provisions of Section 6.06(a) below, be paid to him in one of the four (4)
following methods of payment elected by such member:
(i) In such number of annual installments not less than two
(2) nor more than ten (10) as such member shall have elected, in cash or in
shares of Common Stock, as such member shall have elected, payable on the first
day of March of the calendar year following the year in which termination of
Service of such member shall have taken place, or as soon as
<PAGE> 25
practicable thereafter, and continuing on the first day of March, or as soon as
practicable thereafter, of each calendar year thereafter until the total amount
of the Award subject to such election for such Compensation Year shall have
been paid.
(ii) In three (3) annual installments in cash, payable on the
first day of March of the second calendar year after the Compensation Year for
which the Award shall have been made, or as soon as practicable thereafter, and
continuing on the first day of March, or as soon as practicable thereafter, of
each calendar year thereafter until the total amount of the Award subject to
such election for such Compensation Year shall have been paid.
(iii) In one (1) payment, in cash, equal to the full
amount of the Award subject to such election for such Compensation Year,
payable on the first day of March, or as soon as practicable thereafter, of the
fourth calendar year after the Compensation Year for which the Award shall have
been made.
(iv) In one (1) payment, in cash, shares of Common Stock or
such other form as the Incentive Committee shall determine, equal to the full
amount of the Award subject to such election for such Compensation Year,
payable on the first day of March of the calendar year following the year in
which termination of Service of such member shall have taken place, or as soon
as practicable thereafter.
(c) The amount subject to the election provided for in Section
6.04(b) above for any Compensation Year shall be
<PAGE> 26
25%, 50%, 75%, or 100% of the Basic Portion of the Incentive Compensation Award
for such Compensation Year as the member shall have elected prior to February
1st of such Compensation Year.
(d) Any election in respect of the Basic Portion of an Incentive
Compensation Award for a Compensation Year shall be made no later than the
January 31st of such Compensation Year, and each such election so made shall be
in all respects irrevocable and binding upon the Participant and his
Beneficiary on February 1st of such Compensation Year.
(e) Any amount payable in shares of Common Stock in respect of the
Basic Portion of an Incentive Compensation Award for a Compensation Year shall,
if authorized before the commencement of such Compensation Year by the
Incentive Committee as an alternative form of payment and if so elected by the
Participant prior to February 1st of such Compensation Year pursuant to
authorization of the Incentive Committee, be paid,
(i) as soon as practicable after the Award shall have been
made, in Restricted Shares, with the lapse of restrictions coinciding with the
date or dates on which payment of shares of Common Stock would otherwise have
been made, or
(ii) in cash, on each date on which payment in shares of
Common Stock would otherwise have been made in an amount equal to the Fair
Market Value on each such date of a number of shares equal to the number of
shares of Common Stock that would otherwise have been paid on such date.
<PAGE> 27
(f) The dollar amount of that part of the Basic Portion of an
Incentive Compensation Award payable in or measured by the value of shares of
Common Stock shall be used to determine the largest number of shares of Common
Stock that such dollar amount would purchase at the average market value of the
Common Stock during the Compensation Year for which the Award shall have been
made, and such amount shall be payable in or measured by the value of the
number of shares of Common Stock so determined in the manner and subject to the
conditions hereinafter set forth. Such average market value (herein sometimes
for convenience referred to as the "plan value") shall be deemed the average of
the highest and lowest quoted selling prices of Common Stock on sales, regular
way, reported for the last full trading day of each of the twelve (12) calendar
months of such Compensation Year for New York Stock Exchange issues on the
consolidated stock exchange network.
(g) Until the total amount payable in respect of the Basic Portion
of an Award payable in, or measured by the value of, shares of Common Stock
shall have been paid or shall cease to be payable, the Participant (or, in case
of the prior death of the Participant, his Beneficiary) shall be credited with
Dividend Equivalents with respect to such shares of Common Stock as and
whenever a cash dividend is declared and paid upon shares of Common Stock.
Credits in respect of Dividend Equivalents shall be applied, as and when
dividends are declared and paid on shares of outstanding Common Stock, toward
the credit of a number of additional shares of Common Stock,
<PAGE> 28
based upon the Fair Market Value of a number of shares equal to such credits at
the time such credits are applied, and Dividend Equivalents shall in turn be
credited upon the additional shares so credited. If the date of payment of
shares (or cash measured by the value of shares) in respect of the Basic
Portion of an Award shall occur after the record date of a dividend
constituting a Dividend Equivalent but prior to the date of payment of such
dividend, the Dividend Equivalent in respect of such dividend shall be paid or
credited as of the date of payment of such dividend.
(h) The dollar amount of that part of the Basic Portion of an
Incentive Compensation Award that is not payable in (or measured by the value
of) shares of Common Stock shall be credited with interest equivalents to the
extent that such amount has not been distributed. Interest equivalents shall
be credited and compounded annually and shall be paid at the time or times
provided for payment of the Award constituting the principal therefor. Such
interest equivalents shall be credited at such rate or rates as the Incentive
Committee shall determine from time to time.
(i) To the extent that an Incentive Compensation Award is payable
in (or measured by the value of) shares of Common Stock, each installment,
except the last, shall consist of (or be based on) the aggregate number of such
shares of Common Stock, to the extent that such number of shares (or the value
thereof) has not been distributed and including any additional shares credited
in accordance with the provisions of
<PAGE> 29
Section 6.04(g) above, divided by the number of remaining installments. If the
number of shares that the preceding sentence requires is not a whole number of
shares for any installment, that installment shall consist of (or be based on)
the nearest number of whole shares of Common Stock. The last installment shall
consist of (or be based on) the number of whole shares of Common Stock (or the
value thereof) remaining to be distributed to the Participant, and any
fractional share shall be paid in cash, based on Fair Market Value as of the
date of payment.
(j) To the extent that an Incentive Compensation Award is not
payable in (or measured by the value of) shares of Common Stock, each
installment shall be equal to the then current value of the Award, to the
extent such Award has not been distributed and including any additional amounts
credited in accordance with the provisions of Section 6.04(h) above, divided by
the number of remaining installments.
(k) In case of a "change in control" (as defined in Section 7.09
below) or the death of a Participant after the commencement of payments to him
on account of an Incentive Compensation Award, the then remaining unpaid
portion thereof shall be paid to the Participant or his Beneficiary in a single
payment within ten (10) days or as soon as practicable thereafter.
(l) The part of the Basic Portion of an Incentive Compensation
Award payable in a year or years following the year in which the Incentive
Compensation Award shall have been
<PAGE> 30
made may be subject to such terms and conditions as the Incentive Committee, in
advance of the Compensation Year for which Incentive Compensation Awards are to
be made, shall have prescribed, but unless so prescribed by the Incentive
Committee, the part of the Basic Portion of an Incentive Compensation Award so
payable shall not be subject to any such terms and conditions.
6.05 Time and Form of Payment of the Deferred Portion of an Award
(a) The dollar amount of the Deferred Portion of an Incentive
Compensation Award shall be used to determine the number of shares of Common
Stock that such dollar amount would purchase at the average market value of the
Common Stock during the Compensation Year for which the Award shall have been
made, and such amount shall be payable in and measured by the value of the
number of shares of Common Stock so determined in the manner and subject to the
conditions hereinafter set forth. Such average market value (herein sometimes
for convenience referred to as the "plan value") shall be deemed the average of
the highest and lowest quoted selling prices of Common Stock on sales, regular
way, reported for the last full trading day of each of the twelve (12) calendar
months of such Compensation Year for New York Stock Exchange issues on the
consolidated stock exchange network. Such number of shares of Common Stock
shall be credited to the Participant, but such shares shall actually be issued
only when, and to the extent that, the
<PAGE> 31
Deferred Portion of the Award becomes payable in accordance with the provisions
of Section 6.05(d), (e), and (f) below.
(b) Until the total amount payable in respect of the Deferred
Portion of an Incentive Compensation Award shall have been paid or shall cease
to be payable, the Participant (or, in case of the prior death of the
Participant, his Beneficiary) shall be credited with Dividend Equivalents with
respect to the shares of Common Stock determined in accordance with the
provisions of Section 6.05(a) above as and whenever a cash dividend is declared
and paid upon shares of Common Stock. Credits in respect of Dividend
Equivalents shall be applied, as and when dividends are declared and paid on
shares of outstanding Common Stock, toward the credit of additional shares of
Common Stock, based upon the Fair Market Value of a number of shares equal to
such credits at the time of such credits, and Dividend Equivalents shall in
turn be credited upon the additional shares so credited. The additional shares
so credited or, if so provided with respect to an Award, installments thereof,
together with any cash not credited toward whole shares, shall actually be
issued and distributed only when, and to the extent that, the Deferred Portion
of the Award becomes payable in accordance with the provisions of Section
6.05(d), (e), and (f) below. If the date of payment for the Deferred Portion
of an Award shall occur after the record date of a dividend constituting a
Dividend Equivalent, but prior to the date of payment of such dividend, the
Dividend
<PAGE> 32
Equivalent in respect of such dividend shall be paid or credited as of the date
of payment of such dividend.
(c) The Deferred Portion of an Award (including any additional
shares credited in accordance with the provisions of Section 6.05(b) above)
shall not be paid and shall be forfeited if the Participant terminates
employment for any reason other than death or Disability before becoming
eligible to retire under the terms of The Upjohn Retirement Plan, as amended
from time to time, unless the Incentive Committee determines otherwise in its
discretion.
(d) The shares of Common Stock credited to a Participant pursuant
to the Deferred Portion of an Award (including any additional shares credited
in accordance with the provisions of Section 6.05(b) above) shall be payable
(or begin to be payable) (A) within ten (10) days following a "change in
control" (as defined in Section 7.09 below), or (B) on the first day of March
of the calendar year following the year in which the first of the following
occurs:
(i) the Participant's death;
(ii) the Participant's termination of employment by reason of
Disability;
(iii) the Participant's retirement in accordance with the terms
of The Upjohn Retirement Plan, as amended from time to time; or
(iv) the Participant's termination of employment for any other
reason if, and to the extent that, in accordance with the provisions of
Section
<PAGE> 33
6.05(c) above, the Incentive Committee determines that all or part of the
Deferred Portion of an Award (including any additional shares credited in
accordance with the provisions of Section 6.05(b) above) shall not be
forfeited;
or as soon as practicable thereafter, and shall be paid exclusively in shares
of Common Stock, except that any fractional share shall be paid in cash (based
on Fair Market Value as of the date of payment).
(e) In the event that a member of the Incentive Compensation Group
in respect of a Compensation Year shall have so elected, in accordance with the
provisions of Section 6.05(g) below, with respect to the Deferred Portion of an
Incentive Compensation Award that may be made to him for such Compensation
Year, the Deferred Portion of the Award for such Compensation Year that is
subject to an election under the provisions of Section 6.05(g) below shall be
paid to him in such number of annual installments, not less than two (2) or
more than ten (10), as such member shall have elected, payable on the first day
of March of the calendar year specified by the provisions of Section 6.05(d)
above, or as soon as practicable thereafter, and continuing on the first day of
March, or as soon as practicable thereafter, of each calendar year thereafter
until the total amount of the Award (including any additional shares credited
in accordance with the provisions of Section 6.05(b) above) subject to such
election for such Compensation Year shall have been paid. However, unless the
<PAGE> 34
member elects otherwise, the Deferred Portion of an Incentive Compensation
Award shall be paid in a single payment on the date specified by the provisions
of Section 6.05(d) above.
(f) Each installment paid in accordance with the provisions of
Section 6.05(e) above, except the last, shall consist of the aggregate number
of shares of Common Stock in which the Deferred Portion of the Award (including
any additional shares credited in accordance with the provisions of Section
6.05(b) above) is then payable, divided by the number of remaining
installments. If the number of shares that the preceding sentence requires is
not a whole number of shares for any installment, that installment shall
consist of the nearest number of whole shares of Common Stock. The last
installment shall consist of the number of whole shares of Common Stock
remaining to be distributed to the Participant, and any fractional share shall
be paid in cash, based on Fair Market Value as of the date of payment.
(g) Any election to receive installments in respect of the
deferred portion of an Incentive Compensation Award for a Compensation Year
shall be made no later than the January 31st of such Compensation Year, and
each such election so made shall be in all respects binding and irrevocable
upon the Participant and his Beneficiary on February 1st of such Compensation
Year.
(h) In case of the death of a Participant, the Deferred Portion of
an Incentive Compensation Award payable in respect of the Participant shall be
paid to the Beneficiary of
<PAGE> 35
the Participant, in accordance with the provisions of Section 6.05(d) above, in
a single payment. In case of the death of a Participant after the commencement
of installment payments to him on account of the Deferred Portion of an
Incentive Compensation Award, the then remaining unpaid portion thereof shall
be paid to the Beneficiary of the Participant in a single payment as soon as
practicable after the Participant's death.
6.06 Generally Applicable Payment Provisions
(a) Anything herein to the contrary notwithstanding, no annual
installment (other than the last) of an Incentive Compensation Award payable in
cash shall, when added to all other annual installments payable at the same
time under this and all prior incentive compensation plans of the Company, be
less in amount than $5,000, and no annual installment (other than the last) of
an Incentive Compensation Award payable in shares of Common Stock shall, when
added to all other annual installments payable at the same time under this and
all prior incentive compensation plans of the Company, be less in number than
one hundred (100) shares. If and to the extent necessary to carry out the
foregoing provision, installments of Awards in one or more of the methods of
payment elected under Section 6.04 or 6.05 above or under other incentive
compensation plans of the Company shall be accelerated, with the earliest Award
or Awards in point of time first accelerated for that purpose.
(b) Application of the provisions of Sections 6.04 and 6.05 above
to payment of Incentive Compensation Awards
<PAGE> 36
shall not be deemed either to increase or to decrease the amount of such Awards
or to increase Maximum Incentive Compensation.
6.07 Certain Provisions Relating to Participation
(a) No Employee, member of the Incentive Compensation Group, no
Participant, no Beneficiary, no person claiming under or through any of them,
nor any other person shall have any right or interest, whether vested or
otherwise, in the Program or its continuance, or in or to the payment of any
Incentive Compensation Award under the Program, whether such Award be vested,
contingent or otherwise, unless and until all of the terms, conditions and
provisions of the Program that affect such Award and its payment and of any
terms, conditions and provisions made in or in connection with such Award and
its payment shall have been fully complied with as specifically provided in the
Program and the rules and regulations of the Incentive Committee thereunder.
No rights under the Program, contingent or otherwise, shall be assignable or
subject to any encumbrance, pledge or charge of any nature, except as may be
provided with respect to Restricted Shares and except that, with respect to the
unpaid balance of an Award, a Participant may, under such rules and regulations
as the Incentive Committee may establish, designate a Beneficiary to receive
such unpaid balance of an Award, and except that, if the Beneficiary of a
Participant shall be the personal representative of the Participant, such
personal representative may
<PAGE> 37
transfer any such unpaid portion of an Award to the person, persons or entity
(including a trust) entitled thereto under the will of the Participant or, in
case of intestacy, under the laws relating to intestacy.
(b) It is contemplated that the Company, although under no legal
obligation to do so, may from time to time purchase shares of Common Stock for
the purpose of paying all or any part of the unpaid balance of any Incentive
Compensation Award payable in or measured by the value of shares of Common
Stock or of replacing other shares issued or transferred in payment of all or
part of an Award or of discharging its obligations in respect of Options and
Stock Appreciation Rights. All shares so purchased shall, unless and until
transferred in payment of such unpaid balance or obligations, be and at all
times remain the property of the Company available for any corporate purpose,
and neither the Incentive Compensation Group for any Compensation Year,
individually or as a group, nor any Participant or Beneficiary, shall have any
right, title or interest in any shares so purchased.
6.08 Other Compensation or Incentive Arrangements
The Program shall not be deemed a substitute for, and shall not
preclude the establishment or continuation of, any other plan, practice or
arrangement for the payment of compensation, special awards or fringe benefits
to employees generally, or to any class or group of employees, that the Company
or a Subsidiary or affiliated corporation or
<PAGE> 38
organization now has or may hereafter lawfully put into effect, including,
without limitation, any retirement, pension, excess benefit, thrift, savings,
profit-sharing or incentive or group insurance plan or any plan of a foreign
Subsidiary or affiliated corporation or organization for its employees
stationed in foreign countries.
7. The 1992 Stock Option Plan
7.01 Stock Subject to Stock Option Plan
The shares for which Options and Stock Appreciation Rights may be granted
under the 1992 Stock Option Plan shall be shares of the Common Stock of the
Company. Subject to Section 8.02 below, the number of shares that may be
purchased upon exercise of Options that may from time to time be granted under
the Program or that may be transferred in respect of Stock Appreciation Rights
shall not exceed, in the aggregate, nine million (9,000,000) shares of such
Common Stock, a number that shall be subject to adjustment as provided in
Section 4 above. If an Option, or a Stock Appreciation Right, after having
been granted under the Program, shall for any reason expire or terminate
without having been exercised in full, and shares shall not have been
transferred nor cash paid in respect of a Stock Appreciation Right relating to
an Option so granted, the shares theretofore subject to such Option or Stock
Appreciation Right, as the case may be, and not purchased or transferred shall
be added to the shares otherwise available for Options and Stock Appreciation
Rights that may thereafter be granted. The shares to be transferred upon
exercise of Options or in
<PAGE> 39
respect of Stock Appreciation Rights may be made available, at the discretion
of the Board of Directors, from authorized but unissued shares of the Company,
from stock at any time held in the treasury of the Company or from shares
acquired by the Company for the purpose of the Program, including shares
purchased at any time or from time to time in the open market. Subject to the
limitations set forth in Section 7.02 below, some or all of the Options granted
under the Program may be Incentive Stock Options.
7.02 Number of Shares Subject to Individual Incentive Stock Options
There shall be no limit on the number of shares of Common Stock that may
be purchased upon exercise of an Option or Options or that may be transferred
upon exercise of Stock Appreciation Rights granted under the Program to any
individual Employee. The aggregate Fair Market Value (determined as of the
date such Option is granted) of, as applicable, (i) Common Stock for which any
Employee may be granted Incentive Stock Options in any calendar year, or (ii)
Common Stock with respect to which Incentive Stock Options granted to any
Employee become, in accordance with procedures to be established by the
Incentive Committee, exercisable for the first time by such Employee during any
calendar year (in the case of both (i) and (ii), under the Program and all
other plans, if any, that provide for the granting of Incentive Stock Options
and that are maintained by the Company, a Subsidiary or any other
<PAGE> 40
affiliated corporation) shall not exceed the maximum amount permitted by the
Internal Revenue Code of 1986, as it may be amended from time to time.
7.03 Factors to be Considered in Granting Options
(a) An Option and a Stock Appreciation Right shall be granted only
to an Eligible Employee and only for a reason or reasons connected with
employment. An Eligible Employee may be granted more than one Option and Stock
Appreciation Right subject, however, to the provisions of Section 7.02 above,
but only during the term of the Program. The Incentive Committee, with respect
to corporate officers, and the Chief Executive Officer, with respect to all
other eligible Participants, shall determine the Employees to whom Options
shall be granted and the number of shares for which any Option or Stock
Appreciation Right shall be granted, taking into account the duties of the
Employee, his present and potential contributions to the success of the
Company, his compensation, and such other factors as the Incentive Committee,
with respect to corporate officers, and the Chief Executive Officer, with
respect to all other eligible Participants, shall deem relevant to the
accomplishment of one or more purposes of the Program.
(b) Notwithstanding the provisions of Section 7.03(a) above, if an
optionee who is an active Eligible Employee exercises an Option (the "Exercised
Option") by tendering to the Company shares of Common Stock in accordance with
the provisions of Section 7.05(b) below, the optionee
<PAGE> 41
shall be granted, as of the date of exercise, an Option (the "Replacement
Option") to purchase the number of shares tendered by the optionee in
exercising the Exercised Option. The terms of the Replacement Option shall be
identical to the terms of the Exercised Option, except that (i) the option
price shall be determined in accordance with the provisions of Section 7.04
below as of the date on which the Replacement Option is granted, (ii) the one
(1) year of employment requirement imposed by the provisions of Section 7.05(a)
below shall not apply to the Replacement Option, and the Replacement Option
shall be exercisable after the expiration of such period of time, if any, as
may be specified by the Incentive Committee, and (iii) the Replacement Option
shall not be an Incentive Stock Option. The Replacement Option shall expire on
the expiration date of the Exercised Option. This Section 7.03(b) shall apply
not only upon the exercise of Options under the Program, but also upon the
exercise of those Options granted under The Upjohn Management Incentive Program
of 1987 that are subject to provisions that are substantially identical to the
provisions of this Section 7.03(b).
7.04 Option Price
The purchase price of the shares of Common Stock upon the exercise of an
Option granted under the Program shall be not less than the Fair Market Value
of such shares on the date the Option is granted and in no event less than the
par value thereof.
<PAGE> 42
7.05 Exercise of Options
(a) An Option (other than a Replacement Option, as defined by the
provisions of Section 7.03(b) above) shall not be exercisable until the
optionee has completed one (1) year of employment with the Company or a
Subsidiary from the date of grant of the Option, and shall be exercisable after
the completion of that year of employment. After an Option shall have become
exercisable, all or any part of the shares subject to the Option may be
purchased at any time or from time to time thereafter during the remainder of
the term of the Option; provided, that except as otherwise set forth in Section
7.07 below, an Option may not be exercised unless the holder thereof shall at
the time of such exercise be an Employee.
(b) The purchase price of the shares as to which an Option shall
be exercised shall be paid in full in cash at the time of exercise.
Alternatively, in lieu of cash, an optionee may exercise his Option by
tendering to the Company shares of the Common Stock of the Company, owned by
him, and having a Fair Market Value equal to the cash exercise price applicable
to his Option, with the Fair Market Value of such stock to be determined in
such appropriate manner as may be provided for by the Incentive Committee or as
may be required in order to comply with or to conform to the requirements of
any applicable or relevant laws or regulations; provided, that the Incentive
Committee may determine that an Option shall provide that the optionee may not
tender shares of Common Stock of the Company unless such shares have been held
by the
<PAGE> 43
optionee for a minimum period of time specified by the Incentive Committee.
(c) The holder of an Option shall not have any of the rights of a
stockholder with respect to any share subject to such Option unless and until
he shall become the holder of record of such share.
(d) No Option granted under the Program shall in any event, and
notwithstanding any provision in Section 7.05(a) above or Sections 7.07 and
9.06 below, be exercisable after the expiration of ten (10) years from the date
on which the Option shall have been granted.
(e) Each Option granted under the Program may be made exercisable
upon such other terms and conditions consistent with the Program as shall be
determined by the Incentive Committee, including provisions to the effect that
the shares subject to the Option shall be Restricted Shares.
7.06 Nontransferability and Other Matters Pertaining to Options and Stock
Appreciation Rights
Options and any Stock Appreciation Rights granted under the Program shall
not be transferable otherwise than by will or the laws of descent and
distribution and shall be exercisable, during the lifetime of the Employee,
only by him or by his guardian or legal representative; provided, that nothing
in the Program shall prevent the designation of a Beneficiary.
<PAGE> 44
7.07 Termination of Employment
In case the employment of an Employee to whom an Option shall have been
granted shall be terminated otherwise than as a result of death, the Option may
be exercised (but only to the extent that the Employee shall have been entitled
to exercise the Option on the termination of his employment) during such period
after the date on which he shall have ceased to be an Employee as shall be
prescribed in the option grant. Subject to Section 7.05(d) above, such period
shall be five (5) years following termination of employment by retirement at or
after age sixty five (65) or after the sum of the Participant's age and years
of service (as determined pursuant to The Upjohn Retirement Plan, as amended
from time to time) equals or exceeds ninety two (92), and three (3) months
following other termination of employment unless, prior to the expiration of
such three (3) months' period, the Incentive Committee in the case of an
officer or director of the Company, or the Chief Executive Officer of the
Company in the case of other Employees, shall have authorized in writing, in
its discretion, a five (5) year period following such termination for exercise
of the Option; provided, that a lesser period or periods for exercise following
retirement or other termination of employment may be prescribed by the
Incentive Committee upon or prior to the option grant. Subject to the
provisions of Section 7.05(d) above, if an Employee to whom an Option shall
have been granted shall die while he shall be employed by the Company or one of
its Subsidiaries or during the period after
<PAGE> 45
the termination of his employment within which the Option shall be exercisable
pursuant to this Section 7.07, the Option may be exercised (but only to the
extent that the Employee shall have been entitled to exercise the Option
immediately prior to his death) within one (1) year from the date of the
Employee's death, unless a lesser period for such exercise shall have been
prescribed in the option grant.
7.08 Stock Appreciation Rights
(a) Stock Appreciation Rights may be granted in connection with
any Option granted under the Program, either at the time of the grant of such
Option or at any time thereafter during the term of the Option, or may be
granted independently of the grant of an Option. Stock Appreciation Rights may
also be granted in connection with any option heretofore or hereafter granted
under any prior stock option plans of the Company, or as an addition to or
substitution for options or stock appreciation rights granted under such plans
or under the Program.
(b) If granted in connection with an Option, Stock Appreciation
Rights shall entitle the holder of the related Option, upon exercise of such
Stock Appreciation Rights, to surrender the Option, or any portion thereof, to
the extent unexercised, and to receive a number of shares of Common Stock, or
cash, determined pursuant to the provisions of clause (c)(iii) of this Section
7.08. Such Option shall, to the extent so surrendered, thereupon cease to be
exercisable. If
<PAGE> 46
granted independently of an Option, Stock Appreciation Rights shall entitle the
holder of the Stock Appreciation Rights to receive a number of shares of Common
Stock, or cash, determined pursuant to the provisions of clause (c)(iii) of
this Section 7.08.
(c) Stock Appreciation Rights shall be subject to the following
terms and conditions and to such other terms and conditions not inconsistent
with the Program as shall from time to time be approved by the Incentive
Committee:
(i) If granted in connection with an Option, Stock
Appreciation Rights shall be exercisable at such time or times and to the
extent, but only to the extent, that the Option to which they relate shall be
exercisable. If granted independently of an Option, Stock Appreciation Rights
shall be exercisable at such time or times as shall be determined by the
Incentive Committee at the time of the grant of the Stock Appreciation Rights
but in no event later than the period provided in Section 7.07 for exercise of
an Option.
(ii) Stock Appreciation Rights shall in no event be
exercisable unless and until the holder of the Stock Appreciation Rights shall
have completed at least twelve (12) months of continuous Service with the
Company or a Subsidiary, or both, immediately following the date upon which the
Stock Appreciation Rights shall have been granted. Whether authorized leaves
of absence or absence for military or government service shall constitute
termination of employment
<PAGE> 47
or interruption of continuous Service for purposes of the Program shall be
determined by the Incentive Committee.
(iii) Upon the exercise of Stock Appreciation Rights, the
holder thereof shall be entitled to receive a number of shares equal in Fair
Market Value to the amount by which the Fair Market Value of one (1) share of
Common Stock on the date of such exercise shall exceed the Fair Market Value of
a share of Common Stock on the date of grant of the related Option if such
Stock Appreciation Rights were granted in connection with an Option or on the
date of grant of such Stock Appreciation Rights if such Stock Appreciation
Rights were granted independently of an Option, multiplied by the number of
shares in respect of which the Stock Appreciation Rights shall have been
exercised. The Incentive Committee may authorize settlement of all or any part
of the Company's obligation arising out of an exercise of Stock Appreciation
Rights by the payment of cash equal to the aggregate Fair Market Value of
shares of Common Stock (or a fraction of a share) that the Company would
otherwise be obligated to deliver under the preceding sentence of this Section
7.08(c)(iii).
(d) To the extent that Stock Appreciation Rights shall be
exercised, an Option in connection with which such Stock Appreciation Rights
shall have been granted shall be deemed to have been exercised for the purpose
of the maximum limitations set forth in the Program. In the case of Stock
Appreciation Rights granted independently of an Option, the number of shares of
Common Stock in respect of which such Stock
<PAGE> 48
Appreciation Rights shall be exercised shall be charged against such maximum
limitations.
(e) If so directed by the Incentive Committee, the grant of Stock
Appreciation Rights may provide for payment from time to time to the holder of
the Stock Appreciation Rights, either in cash or in shares of Common Stock, of
amounts not exceeding the cash dividends, as and when declared or paid, that
would be paid in respect of a number of shares of Common Stock equal to the
number of shares subject to the Stock Appreciation Rights if such shares were
held by the holder of the Stock Appreciation Rights from the time the Stock
Appreciation Rights were granted to such holder to the time when they are
exercised or lapse or otherwise terminate.
(f) An Employee or, in the event of his death, his Beneficiary or
the person or persons to whom the related Option or Stock Appreciation Rights
are transferred by will or the laws of descent and distribution, shall have no
rights as a stockholder with respect to any shares subject to Stock
Appreciation Rights until he shall become a holder of record of such shares.
7.09 Cash Payment for Options upon Change in Control
(a) Notwithstanding any other provision of the Program or of any
outstanding Option, in the event of a change in control, the Company shall pay
to each optionee with respect to each Option held by the optionee, excluding
Options held by officers of the Company elected by the Board of Directors that
are not exercisable on the date of such change in control, an
<PAGE> 49
amount in cash, which shall be payable within ten (10) days after the change in
control, equal to the difference between (i) the result of multiplying (A) the
number of shares of Common Stock subject to each outstanding Option by (B) the
market value of the Common Stock and (ii) the aggregate purchase price for such
shares. Upon such payment, all Options for which such cash payment is made
(and any related Stock Appreciation Rights) shall be cancelled.
(b) If an officer of the Company elected by the Board of Directors
holds an Option that is not exercisable in full on the date of a change in
control and such officer remains in employment with the Company or a Subsidiary
until the date such Option becomes exercisable, then, notwithstanding any other
provision of the Program or of the Option, the Company shall pay to such
officer on each date on which all or a portion of such Option becomes
exercisable an amount equal to the difference between (1) the result of
multiplying (i) the number of shares of Common Stock subject to such Option
that first become exercisable on that date by (ii) the market value of the
Common Stock and (2) the aggregate purchase price for such shares. If the
employment of such officer terminates other than for cause, prior to the date
the Option becomes exercisable in full, the Company shall pay to such officer
(or, in the event of the officer's death, to the estate of the officer) within
ten (10) days following termination of employment an amount equal to the
difference between (A) the result of multiplying (x) the number of shares of
Common Stock
<PAGE> 50
subject to such Option that were not exercisable upon termination of employment
by (y) the market value of the Common Stock and (B) the aggregate purchase
price for such shares. Upon payment, pursuant to this paragraph (b), all
Options for which such cash payment is made (and any related Stock Appreciation
Rights) shall be cancelled.
(c) For purposes of this Section 7.09, a "change in control" shall
mean a change in control of a nature that would be required to be reported in
response to Item 1(a) of the Current Report on Form 8-K, as in effect on
November 20, 1990, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (the "Exchange Act"), provided that, without limitation, such a
change in control shall be deemed to have occurred (whether or not required to
be reported in response to Item 1(a) of a Current Report on Form 8-K) at such
time as (1) any "person", within the meaning of Section 14(d) of the Exchange
Act, other than the Company or a Subsidiary or any employee benefit plan(s)
sponsored by the Company or a Subsidiary, is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
twenty five percent (25%) or more of the Common Stock, or (2) individuals who
constitute the Board of Directors of the Company on November 20, 1990 (the
"Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to such date
whose election, or nomination for election by the Company's stockholders, was
approved by a vote of at least three-quarters
<PAGE> 51
(3/4) of the directors comprising the Incumbent Board (either by a specific
vote or by approval of the proxy statement of the Company in which such person
is named as a nominee for director, without objection to such nomination) shall
be, for purposes of this paragraph (c), considered as though such person were a
member of the Incumbent Board. In addition, for purposes of this Section 7.09,
"market value" shall mean (i) in the event the change in control is the result
of a cash tender offer for all of the Common Stock, the cash paid to
stockholders in such tender offer or (ii) otherwise, the highest Fair Market
Value of the Common Stock during the ten (10) trading day period preceding the
change in control. For purposes of this Section 7.09, "cause" means (x) the
willful and continued failure by an officer of the Company elected by the Board
of Directors to substantially perform his duties for the Company (other than
such failure resulting from incapacity due to physical or mental illness) after
a written demand for substantial performance is delivered to the officer by the
Chairman of the Board of Directors or President of the Company that
specifically identifies the manner in which such executive believes that the
officer has not substantially performed his duties, or (y) the willful engaging
by the officer in illegal conduct that is materially and demonstrably injurious
to the Company.
<PAGE> 52
8. The 1992 Performance Share Plan
8.01 Performance Share Awards
The Incentive Committee, with respect to corporate officers, and the Chief
Executive Officer, with respect to all other eligible Participants, may, no
later than March 30 of the first Compensation Year that will be included in the
Award Period, grant Performance Share Awards to selected individuals in the
Incentive Compensation Group. In connection with the granting of each such
Performance Share Award, the Incentive Committee, with respect to corporate
officers, and the Chief Executive Officer, with respect to all other eligible
Participants, shall establish the Award Period and the Vesting Criteria
relating thereto.
8.02 Stock Subject to Performance Share Plan
(a) The number of Performance Shares that may be subject to
Performance Share Awards granted under the 1992 Performance Share Plan shall
not exceed, in the aggregate, two million (2,000,000) shares regardless of
whether any such Awards ultimately are paid in the form of shares of Common
Stock or cash, or any combination thereof, and regardless of whether any such
payment is deferred pursuant to Section 8.05(c) below. The number of shares of
Common Stock available under the Program for purchase upon the exercise of
Options or for transfer in respect of Stock Appreciation Rights shall be
reduced by the number of Performance Shares that are subject to Performance
Share Awards granted under the Program.
<PAGE> 53
(b) If all or any portion of the Performance Share Awards granted
under this Plan fail to vest by virtue of a failure to satisfy the Vesting
Criteria relating thereto, or fail to vest by virtue of the provisions of
Section 8.06 below, the number of Performance Shares subject to such nonvested
Awards shall be added to the shares otherwise available for the grant of
Options, Stock Appreciation Rights and Performance Share Awards, and shall not
be deemed to increase the aggregate number of shares for which Options, Stock
Appreciation Rights and Performance Share Awards may be granted.
(c) The shares used to pay all or any portion of any vested
Performance Share Award payable in the form of shares of Common Stock may be
made available, at the discretion of the Board of Directors, from authorized
but unissued shares of Common Stock, from shares of Common Stock held in the
treasury of the Company from time to time or from shares acquired by the
Company for the purpose of the Program, including shares purchased at any time
or from time to time in the open market.
8.03 Factors to be Considered in Granting Performance Share Awards
Performance Share Awards shall be granted only to an Eligible Employee and
only for a reason or reasons connected with employment. An Eligible Employee
may be granted more than one Performance Share Award, but only during the term
of the Program. In making any determination as to Eligible Employees
<PAGE> 54
to whom Performance Share Awards shall be granted and as to the number of
shares for which such Awards may be granted, the Incentive Committee shall in
each case consider the factors set forth in Section 7.03(a) above.
8.04 Performance Shares
(a) The holder of a Performance Share Award shall not have any of
the rights of a stockholder with respect to any Performance Shares unless and
until such holder shall become a holder of record of shares of Common Stock
paid in respect of such Award.
(b) Notwithstanding Section 8.04(a) above, at the discretion of
the Incentive Committee, as determined at the commencement of each Award
Period, Dividend Equivalents may be credited with respect to Performance Share
Awards during the Award Period relating thereto and until all such Performance
Share Awards that have vested and become distributable are paid, as and
whenever a cash dividend is declared and paid upon shares of Common Stock.
Credits in respect of Dividend Equivalents shall be applied, as and when cash
dividends are declared and paid on shares of outstanding Common Stock, toward
the credit of a number of additional whole shares of Common Stock based upon
the Fair Market Value of a number of shares equal to such credits at the time
of such credits. Dividend Equivalents may in turn be credited upon the
additional shares so credited. Any additional shares so credited pursuant to
this subsection (b), together with any cash not credited toward the
<PAGE> 55
credit of whole shares, may be distributed in such form as the Incentive
Committee may determine, at such time or times as the Performance Share Awards
in respect of which such Dividend Equivalents were credited may have become
vested and be distributed. In case the time or times of vesting and
distribution of such Performance Share Awards shall occur after the record date
of a dividend constituting a Dividend Equivalent but prior to the date of
payment of such dividend, the Dividend Equivalent in respect of such dividend
may be paid or credited as of the date of payment of such dividend.
8.05 Time and Form of Payment of Performance Share Awards
(a) Performance Share Awards shall be paid, subject to the
provisions of Section 8.05(b) and (c) below, as soon as practicable after the
Incentive Committee, with respect to corporate officers, and the Chief
Executive Officer, with respect to all other eligible Participants, shall
determine that the Vesting Criteria relating thereto have been satisfied.
(b) The Incentive Committee, with respect to corporate officers,
and the Chief Executive Officer, with respect to all other eligible
Participants, shall have sole discretion to determine the form of payment.
Payment may be in any number of shares of Common Stock up to the number of
Performance Shares subject to the vested portion of a Performance Share Award,
plus a cash payment measured by the
<PAGE> 56
Fair Market Value of such Performance Shares not distributed in the form of
shares of Common Stock.
(c) All distributions otherwise payable pursuant to the provisions
of Section 8.05(a) and (b) above may be deferred in accordance with the
elections made by the recipient pursuant to the provisions of Section 6.04
above prior to February 1st of the most recent Compensation Year included
within the Award Period and, if so deferred, shall be subject to the payment
options set forth in Section 6.04(b) above and the provisions of Section
6.06(a) above, except that any deferred amounts will be paid within ten (10)
days following a "change in control" (as defined in Section 7.09 hereof).
8.06 Termination of Employment During an Award Period
(a) Except as otherwise provided in Section 8.06(b) below, if the
recipient of a Performance Share Award shall terminate employment with the
Company during an Award Period (i) due to retirement at or after age sixty five
(65); (ii) within two years without cause following a "change in control" (as
defined in Section 7.09 hereof) which shall be deemed to be a reason approved
by the Incentive Committee; or (iii) for any other reason approved by the
Incentive Committee, such Performance Share Award shall remain outstanding
until the conclusion of the Award Period relating thereto, and if applicable,
shall continue to be credited with Dividend Equivalents. Such Performance
Share Award shall vest and become distributable in accordance with the
provisions of the
<PAGE> 57
Performance Share Plan if the Vesting Criteria relating thereto are satisfied
at the conclusion of such Award Period.
(b) If a recipient of a Performance Share Award dies during an
Award Period, the Incentive Committee with respect to corporate officers, and
the Chief Executive Officer with respect to all other eligible Participants,
may, with respect to all or any portion of such Award, deem such individual to
have terminated employment with the approval of the Incentive Committee
pursuant to the provisions of Section 8.06(a) above. Any payments in respect
of any such Award shall be made to such recipient's Beneficiary.
(c) Except as otherwise provided in Section 8.06(a) or (b) above,
if the recipient of a Performance Share Award shall terminate employment with
the Company during an Award Period for any reason, including without
limitation, termination by the Company without cause, any Performance Share
Awards (and any Dividend Equivalents credited with respect thereto) previously
granted to such recipient that are not vested as at the date of such
termination of employment shall be cancelled. Any Performance Shares subject
to such cancelled Awards shall be added to the shares otherwise available for
grant under the Program pursuant to the provisions of Section 8.02(b) above.
8.07 Nontransferability of Performance Shares and Performance Share
Awards
<PAGE> 58
(a) Until such time as Performance Share Awards vest and become
distributable, such Awards, the Performance Shares subject to such Awards, and
any Dividend Equivalents credited in respect thereof shall be nontransferable,
except as provided in Section 8.06(b) above.
(b) To the extent that payment of any vested Performance Share
Awards has been deferred by a recipient pursuant to the provisions of Section
8.05(c) above, the deferred portion of such Award shall, in the event of the
death of such recipient prior to the full distribution of such deferred amount,
be distributed to the recipient's Beneficiary in accordance with the provisions
of the Plan.
8.08 Administration
Performance Share Awards shall be subject to such other terms and
conditions not inconsistent with the 1992 Performance Share Plan as shall from
time to time be approved by the Incentive Committee.
<PAGE> 59
9. General Provisions
9.01 Termination of Employment
Neither the adoption of the Program nor its operation, nor any booklet or
other document describing or referring to the Program, or any part thereof,
shall confer upon any Employee any right to continue in the employ of the
Company or any Subsidiary, or shall in any way affect the right and power of
the Company or any Subsidiary to dismiss or otherwise terminate the employment
of any Employee at any time for any reason with or without cause. If the
Company or a Subsidiary shall terminate the employment of a Participant for any
reason, whether or not for cause, the Company (or, if applicable, the
Subsidiary) shall incur no liability to the Participant due to the inability of
the Participant by reason of such termination to exercise thereafter any Option
or Stock Appreciation Right theretofore granted to the Participant by the
Company or to receive payment of any Award under the Program or to be eligible
thereafter for any Award or grant of an Option or Stock Appreciation Right
under the Program.
9.02 Consent
By accepting participation in or any benefits under the Program, each
member of the Incentive Compensation Group, each Participant, and each person
claiming under or through him, shall be conclusively deemed to have indicated
his acceptance and ratification of, and consent to, any action or decision
<PAGE> 60
taken or made or to be taken or made under the Program by the Company, the
Board of Directors and the Incentive Committee.
9.03 Withholding
Appropriate provision shall be made for all taxes required to be withheld
from Incentive Compensation Awards, and in connection with Options and Stock
Appreciation Rights and the exercise thereof and in connection with payment of
Performance Share Awards, under the applicable laws or other regulations of any
governmental authority, whether Federal, state or local and whether domestic or
foreign, including, but not limited to, the withholding of payment of all or
any portion of such Award or the transfer of shares pursuant to exercise of an
Option or a Stock Appreciation Right until the Participant reimburses the
Company for the amount the Company believes to be required to be withheld with
respect to such taxes, or canceling any portion of an Award in an amount
sufficient to reimburse itself for the amount it believes to be required to be
so withheld, or selling any property contingently credited by the Company for
the purpose of paying such Award, in order to withhold or reimburse itself for
the amount it believes to be required to be so withheld.
9.04 Situs and Governing Law
The place of administration of the Program shall be conclusively deemed to
be within the State of Delaware, and the validity, construction, interpretation
and administration of
<PAGE> 61
the Program and of any rules and regulations or determinations or decisions
made thereunder, and the rights of any and all persons having or claiming to
have any interest therein or thereunder shall be governed by, and determined
exclusively and solely in accordance with, the laws of the State of Delaware.
Without limiting the generality of the foregoing, the period within which any
action arising under or in connection with the Program, or any payment or Award
made or purportedly made under or in connection therewith, must be commenced
shall be governed by the laws of the State of Delaware, irrespective of the
place where the act or omission complained of took place and of the residence
of any party to such action and irrespective of the place where the action may
be brought.
9.05 Communications
Any communication under the Program to the Board of Directors shall be
deemed to have been delivered to the Board when delivered to the Secretary of
the Company for transmission to the Board, irrespective of whether the Board
shall then be in session. Any communication under the Program to the Incentive
Committee shall be deemed to have been delivered to the Incentive Committee
when delivered to the Secretary of the Incentive Committee for transmission to
the Incentive Committee, irrespective of whether the Incentive Committee shall
then be in session.
9.06 Deadlines
<PAGE> 62
If any day on or before which action under the Program must be taken falls
on a Saturday, Sunday or legal holiday, such action may be taken on the next
succeeding day not a Saturday, Sunday or legal holiday.
9.07 Headings
Headings are given to the sections of the Program solely as a convenience
to facilitate reference; neither such headings nor numbering or paragraphing
shall be deemed in any way material or relevant to the construction of the
Program or any provisions thereof.
9.08 Gender and Number
The use of the masculine gender shall also include within its meaning the
feminine. The use of the singular shall also include within its meaning the
plural, and vice versa.
<PAGE> 63
10. Amendment or Repeal
10.01 In General
Subject to the provisions of Sections 10.02 and 10.03 below, the Program
may be amended or repealed by the stockholders of the Company or, if, as and
when the Incentive Committee shall recommend, but not otherwise, by the Board
of Directors.
10.02 Stockholder Approval
Only the stockholders of the Company may amend the provisions of the
Program:
(a) so as to increase Maximum Incentive Compensation for any
Compensation Year above that authorized by the provisions of the Program, but
amendment of the Program so as to change the form or terms of payment of
Incentive Compensation Awards from those provided in the Program shall not be
deemed to increase Maximum Incentive Compensation, provided that the Fair
Market Value of all property transferred in payment of Incentive Compensation
Awards shall not exceed Maximum Incentive Compensation, nor shall Maximum
Incentive Compensation be deemed increased as the result of an increase in
value of capital stock or other property in which an Award under the Program
shall be payable or by which payment of an Award shall be measured or as the
result of any dividends, Dividend Equivalents, interest, interest equivalents
or similar increment paid or payable in respect of any Award;
<PAGE> 64
(b) so as to increase the maximum number of shares that may be
purchased upon exercise of Options granted under the Program, transferred in
respect of Stock Appreciation Rights or transferred or paid in respect of
Performance Share Awards, except as authorized by the provisions of Section 4
above, or so as to decrease the minimum option price provided for in Section
7.04 above, except as so authorized;
(c) so as materially to increase the benefits accruing to
Participants under the Program or materially to modify the requirements as to
the eligibility for participation in the Program;
(d) so as to extend the term of the Program or the period during
which Options may be exercised;
(e) so as to change the provisions of Section 3.01 above relating
to the Incentive Committee; or
(f) so as to change the provisions of this Section 10.
10.03 Benefit Reduction
The provisions of the Program, as in effect on November 15 of any
Compensation Year, shall in all respects remain in effect with respect to any
Incentive Compensation Award, or installment thereof, made or to be made or
payable for such Compensation Year, notwithstanding the amendment or repeal of
the Program subsequent to November 15 of such Compensation Year by either the
Board of Directors or the stockholders. Neither the termination of the Program
by expiration or otherwise, nor
<PAGE> 65
any amendment thereof shall, without the consent of the Participant, adversely
affect his rights under an unexpired Option, Stock Appreciation Right or
Performance Share Award granted to him, or under an Incentive Compensation
Award made to him, prior to such termination or amendment.
<PAGE> 1
Exhibit (10)(g)
SEVERANCE AGREEMENT
THIS AGREEMENT is entered into as of the 15th day of March, 1995 (the
"Effective Date") by and between The Upjohn Company, a Delaware corporation
(the "Company"), and Name~ ("Executive").
W I T N E S S E T H
WHEREAS, Executive currently serves as a key employee of the Company and
his/her services and knowledge are valuable to the Company in connection with
the management of one or more of the Company's principal operating facilities,
divisions, or subsidiaries; and
WHEREAS, the Company considers the establishment and maintenance of a
sound and vital management to be essential to protecting and enhancing the best
interests of the Company and its shareholders; and
WHEREAS, the Board (as defined in Section 1(a)) has determined that it is
in the best interests of the Company and its stockholders to secure Executive's
continued services and to ensure Executive's continued dedication and
objectivity in the event of any threat or occurrence of, or negotiation or
other action that could lead to, or create the possibility of, a Change in
Control (as defined in Section 1(c)) of the Company, without concern as to
whether Executive might be hindered or distracted by personal uncertainties and
risks created by any such possible Change in Control, and to encourage
Executive's full attention and dedication to the Company, the Board has
authorized the Company to enter into this Agreement.
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants and agreements herein contained, the Company and Executive hereby
agree as follows:
1. Definitions. As used in this Agreement, the following terms shall
have the respective meanings set forth below:
(a) "Board" means the Board of Directors of the Company.
(b) "Cause" means (1) a material breach by Executive of the duties and
responsibilities of Executive (other than as a result of incapacity due to
physical or mental illness) which is demonstrably willful and deliberate on
Executive's part, which is committed in bad faith or without reasonable belief
that such breach is in the best interests of the Company and which is not
remedied in a reasonable period of time after receipt of written notice from
the Company specifying such breach or (2) the willful commission by Executive
of illegal
<PAGE> 2
conduct which is materially and demonstrably injurious to the Company. Cause
shall not exist unless and until the Company has delivered to Executive a copy
of a resolution duly adopted by three-quarters (3/4) of the Board at a meeting
of the Board called and held for such purpose (after reasonable notice to
Executive and an opportunity for Executive, together with his/her counsel, to
be heard before the Board), finding that in the good faith opinion of the Board
the Executive was guilty of the conduct set forth in this Section 1(b) and
specifying the particulars thereof in detail. For the purposes of clause (1)
above, any act, or failure to act, by Executive based upon authority given
pursuant to a resolution duly adopted by the Board or based upon the advice of
counsel for the Company shall be conclusively presumed to be done, or omitted
to be done, by Executive in good faith and in the best interests of the
Company.
(c) "Change in Control" means:
(1) the acquisition by any individual, entity or group (a
"Person"), including any "person" within the meaning of Section 13(d) (3) or
14(d) (2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), of beneficial ownership within the meaning of Rule 13d-3 promulgated
under the Exchange Act, of 33% or more of either (i) the then outstanding
shares of common stock of the Company (the "Outstanding Company Common Stock")
or (ii) the combined voting power of the then outstanding securities of the
Company entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); provided, however, that the following
acquisitions shall not constitute a Change in Control: (A) any acquisition by
the Company, (B) any acquisition by an employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation controlled by the
Company, (C) any acquisition by any corporation pursuant to a reorganization,
merger or consolidation involving the Company, if, immediately after such
reorganization, merger or consolidation, each of the conditions described in
clauses (i), (ii) and (iii) of subsection (3) of this Section (1)(c) shall be
satisfied, or (D) any acquisition by the Executive or any group of persons
including the Executive; and provided further that, for purposes of clause (A),
if any Person (other than the Company or any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation controlled by
the Company) shall become the beneficial owner of 33% or more of the
Outstanding Company Common Stock or 33% or more of the Outstanding Company
Voting Securities by reason of an acquisition by the Company and such Person
shall, after such acquisition by the Company, become the beneficial owner of
any additional shares of the Outstanding Company Common Stock or any additional
Outstanding Voting Securities and such beneficial ownership is publicly
announced, such additional beneficial ownership shall constitute a Change in
Control;
<PAGE> 3
(2) individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a majority
of such Board; provided, however, that any individual who becomes a director of
the Company subsequent to the date hereof whose election, or nomination for
election by the Company's stockholders, was approved by the vote of at least
three-quarters of the directors then comprising the Incumbent Board (either by
a specific vote or by approval of the proxy statement of the Company in which
such person is named as a nominee for director, without objection to such
nomination) shall be deemed to have been a member of the Incumbent Board; and
provided further, that no individual who was initially elected as a director of
the Company as a result of an actual or threatened election contest, as such
terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act, or any other actual or threatened solicitation of proxies or consents by
or on behalf of any Person other than the Board shall be deemed to have been a
member of the Incumbent Board;
(3) approval by the stockholders of the Company of a
reorganization, merger or consolidation unless, in any such case, immediately
after such reorganization, merger or consolidation, (i) more than 50% of the
then outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation and more than 50% of the combined
voting power of the then outstanding securities of such corporation entitled to
vote generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the individuals or
entities who were the beneficial owners, respectively, of the Outstanding
Company Common Stock and the Outstanding Company Voting Securities immediately
prior or such reorganization, merger or consolidation and in substantially the
same proportions relative to each other as their ownership, immediately prior
to such reorganization, merger or consolidation, of the Outstanding Company
Common stock and the Outstanding Company Voting Securities, as the case may be,
(ii) no Person (other than the Company, any employee benefit plan (or related
trust) sponsored or maintained by the Company or the corporation resulting from
such reorganization, merger or consolidation (or any corporation controlled by
the Company), or any Person which beneficially owned, immediately prior to such
reorganization, merger or consolidation, directly or indirectly, 33% or more of
the Outstanding Company Common Stock or the Outstanding Company Voting
Securities, as the case may be) beneficially owns, directly or indirectly, 33%
or more of the then outstanding shares of common stock of such corporation or
33% or more of the combined voting power of the then outstanding securities of
such corporation entitled to vote generally in the election of directors and
(iii) at least a majority of the members of the board of directors of the
corporation resulting from such reorganization, merger or consolidation were
members of the Incumbent Board at the time of the execution of the initial
<PAGE> 4
agreement or action of the Board providing for such reorganization, merger or
consolidation; or
(4) approval by the stockholders of the Company of (i) a plan of
complete liquidation or dissolution of the Company or (ii) the sale or other
disposition of all or substantially all of the assets of the Company other than
to a corporation with respect to which, immediately after such sale or other
disposition, (A) more than 50% of the then outstanding shares of common stock
thereof and more than 50% of the combined voting power of the then outstanding
securities thereof entitled to vote generally in the election of directors is
then beneficially owned, directly or indirectly, by all or substantially all of
the individuals and entities who were the beneficial owners, respectively, of
the Outstanding Company Common Stock and the Outstanding Company Voting
Securities immediately prior to such sale or other disposition and in
substantially the same proportions relative to each other as their ownership,
immediately prior to such sale or other disposition, of the Outstanding Company
Common Stock and the Outstanding Company Voting Securities, as the case may be,
(B) no Person (other than the Company, any employee benefit plan (or related
trust) sponsored or maintained by the Company or such corporation (or any
corporation controlled by the Company), or any Person which beneficially owned,
immediately prior to such sale or other disposition, directly or indirectly,
33% or more of the Outstanding Company Common Stock or the Outstanding Company
Voting Securities, as the case may be) beneficially owns, directly or
indirectly, 33% or more of the then outstanding shares of Common stock thereof
or 33% or more of the combined voting power of the then outstanding securities
thereof entitled to vote generally in the election of directors and (C) at
least a majority of the members of the board of directors thereof were members
of the Incumbent Board at the time of the execution of the initial agreement or
action of the Board providing for such sale or other disposition.
Notwithstanding anything contained in this Agreement to the contrary, if
Executive's employment is terminated prior to a Change in Control and Executive
reasonably demonstrates that such termination was at the request of a third
party who has indicated an intention or taken steps reasonably calculated to
effect a Change in Control (a "Third Party") who effectuates a Change in
Control, then for all purposes of this Agreement, the date of a Change of
Control shall mean the date immediately prior to the date of such termination
of Executive's employment.
(d) "Company" means The Upjohn Company, a Delaware corporation.
(e) "Date of Termination" means (1) the effective date on which
Executive's employment by the Company terminates as specified in a Notice of
Termination by the Company or Executive, as the case may be, or (2) if
Executive's employment
<PAGE> 5
by the Company terminates by reason of death, the date of death of Executive.
Notwithstanding the previous sentence, (i) if the Executive's employment is
terminated for Disability (as defined in Section 1(f)), then such Date of
Termination shall be no earlier than thirty (30) days following the date on
which a Notice of Termination is received, and (ii) if the Executive's
employment is terminated by the Company other than for Cause, then such Date of
Termination shall be no earlier than thirty (30) days following the date on
which a Notice of Termination is received.
(f) "Disability" means Executive's absence from his/her duties with the
Company on a full-time basis for at least one hundred eighty (180) consecutive
days as a result of Executive's incapacity due to mental or physical illness.
(g) "Good Reason" means, without Executive's express written consent,
the occurrence of any of the following events after a Change in Control:
(1) (i) the assignment to Executive of any duties inconsistent in
any material adverse respect with Executive's position(s), duties,
responsibilities or status with the Company immediately prior to such Change in
Control, (ii) a material adverse change in Executive's reporting
responsibilities, titles or offices with the Company as in effect immediately
prior to such Change in Control or (iii) any removal or involuntary termination
of Executive by the Company otherwise than as expressly permitted by this
Agreement (including any purported termination of employment which is not
effected by a Notice of Termination), which termination shall not be effective,
or any failure to re-elect Executive to any position with the Company held by
Executive immediately prior to such Change in Control; provided, however, that
notwithstanding anything in this paragraph (1) to the contrary, clauses (i) and
(ii) shall not be applicable to any occurrence that is directly attributable to
the fact that the Company is no longer a publicly traded entity;
(2) a reduction by the Company in Executive's rate of annual base
salary as in effect immediately prior to such Change in Control or as the same
may be increased from time to time thereafter;
(3) any requirement of the Company that Executive (i) be based
anywhere other than the facility where Executive is located at the time of the
Change in Control or (ii) travel on Company business to an extent substantially
more burdensome than the travel obligations of Executive immediately prior to
such Change in Control;
(4) the failure of the Company to (i) continue in effect any
employee benefit plan or compensation plan in which Executive is participating
immediately prior to such Change in Control, unless Executive is permitted to
participate in other
<PAGE> 6
plans providing Executive with substantially comparable benefits, or the taking
of any action by the Company which would adversely affect Executive's
participation in or materially reduce Executive's benefits under any such plan,
(ii) provide Executive and Executive's dependents with welfare benefits
(including, without limitation, medical, prescription, dental, disability,
salary continuance, employee life, group life, accidental death and travel
accident insurance plans and programs) in accordance with the most favorable
plans, practices, programs and policies of the Company and its affiliated
companies in effect for Executive immediately prior to such Change in Control,
(iii) provide fringe benefits in accordance with the most favorable plans,
practices, programs and policies of the Company and its affiliated companies in
effect for Executive immediately prior to such Change in Control, or (iv)
provide Executive with paid vacation in accordance with the most favorable
plans, policies, programs and practices of the Company and its affiliated
companies as in effect for Executive immediately prior to such Change in
Control;
(5) the failure of the Company to obtain the assumption agreement
from any successor as contemplated in Section 9(b); or
(6) the refusal by the Company to continue to allow Executive to
attend to matters or engage in activities not directly related to the business
of the Company which were permitted by the Board immediately prior to such
Change in Control, including without limitation serving on the Boards of
Directors of other companies or entities.
For purposes of this Agreement, any good faith determination of Good
Reason made by Executive shall be conclusive; provided, however, that an
isolated, insubstantial and inadvertent action taken in good faith and which is
remedied by the Company within ten (10) days after receipt of notice thereof
given by Executive shall not constitute Good Reason. Any event or condition
described in this Section 1(g) (1) through (6) which occurs prior to a Change
in Control, but was at the request of a Third Party who effectuates a Change in
Control, shall constitute Good Reason following a Change in Control for
purposes of this Agreement notwithstanding that it occurred prior to the Change
in Control.
(h) "Nonqualifying Termination" means a termination of Executive's
employment (1) by the Company for Cause, (2) by Executive for any reason other
than Good Reason, (3) as a result of Executive's death, (4) by the Company due
to Executive's Disability, unless within thirty (30) days after Notice of
Termination is provided to Executive pursuant to Section 10 following such
Disability Executive shall have returned to performance of Executive's duties
on a full-time basis, or (5) as a result of Executive's Retirement.
<PAGE> 7
(i) "Notice of Termination" means notice of the Date of Termination as
described in Section 10(b).
(j) "Retirement" means termination of employment by either the
Executive or the Company on or after the Executive's normal retirement date
under the terms of the Retirement Plan.
(k) "Retirement Plan" means The Upjohn Retirement Plan or any successor
or substitute plan or plans of the Company put into effect prior to a Change in
Control.
(l) "Termination Period" means the period of time beginning with a
Change in Control and ending on the earliest to occur of (1) Executive's death
and (2) two (2) years following such Change in Control.
2. Term of Agreement. This Agreement shall commence on the Effective
Date and shall continue in effect until March 15, 1998; provided, however, that
commencing on March 15, 1998 and each following third anniversary of the
Effective Date, the term of this Agreement shall automatically be extended for
an additional three-year period, unless at least ninety (90) days prior to such
date, the Company or Executive shall have given notice not to extend this
Agreement; provided, however, that (i) no such action shall be taken by the
Company during any period of time when the Board has knowledge that any person
has taken steps reasonably calculated to effect a Change in Control until, in
the opinion of the Board, such person has abandoned or terminated its efforts
to effect a Change in Control, and (ii) this Agreement shall continue in effect
for at least twenty-four (24) months following the occurrence of a Change in
Control. Notwithstanding anything in this Section 2 to the contrary, this
Agreement shall terminate upon termination of Executive's employment with the
Company prior to a Change in Control (except as otherwise provided hereunder).
3. Obligations of Executive. Executive agrees that in the event any
person or group attempts a Change in Control, he/she shall not voluntarily
leave the employ of the Company (other than as a result of Disability or upon
Retirement) without Good Reason until the earlier of (a) the termination of
such attempted Change in Control or (b) the occurrence of a Change in Control.
For purposes of this Section 3, Good Reason shall be determined as if a Change
in Control had occurred when such attempted Change in Control became known to
the Board.
4. Payments Upon Termination of Employment.
(a) If during the Termination Period the employment of Executive shall
terminate, other than by reason of a Nonqualifying Termination, then the
Company shall pay to Executive (or Executive's beneficiary or estate) within
five (5) days following Date of Termination, as compensation for services
rendered to the Company:
<PAGE> 8
(1) a lump-sum cash amount equal to the sum of Executive's unpaid
base salary from the Company and its affiliated companies through the Date of
Termination, (at the rate in effect (without taking into account any reduction
of base salary constituting Good Reason) just prior to the time a Notice of
Termination is given) plus any benefit awards (including both the cash and
stock components) and bonus payments which pursuant to the terms of any plans
have been earned or become payable, to the extent not theretofore paid;
(2) a lump-sum cash amount equal to 2.5 times (a) Executive's
highest annual rate of base salary from the Company and its affiliated
companies in effect during the 12-month period prior to the Date of Termination
plus (b) the highest amount earned (including any deferred amounts) by
Executive pursuant to any annual bonus plan of the Company during the
three-year period immediately preceding the year in which the Change in Control
occurs; provided, that any amount paid pursuant to this Section 4(a)(2) shall
offset any other amount of severance relating to salary or bonus continuation
to be received by Executive upon termination of employment of Executive under
any other severance plan, policy, employment agreement or arrangement of the
Company.
(b) If during the Termination Period, the employment of Executive shall
terminate, other than by reason of a Nonqualifying Termination, then for a
period terminating on the earliest of (i) thirty (30) months following the Date
of Termination, (ii) the commencement date of equivalent benefits from a new
employer, or (iii) Executive's normal retirement date under the terms of the
Retirement Plan, the Company shall continue to keep in full force and effect
(or otherwise provide) all policies of medical, accident, disability and life
insurance with respect to Executive and his/her dependents with the same level
of coverage, upon the same terms and otherwise to the same extent as such
policies shall have been in effect immediately prior to the Date of Termination
(or, if more favorable to Executive, immediately prior to the Change in
Control), and the Company and Executive shall share the costs of the
continuation of such insurance coverage in the same proportion as such costs
were shared immediately prior to the Date of Termination (or, if more favorable
to Executive, immediately prior to the Change in Control). If, at the end of
thirty (30) months following the Date of Termination, Executive has not reached
his/her normal retirement date under the Retirement Plan, and has not
previously received or is not then receiving equivalent benefits from a new
employer, the Company shall arrange to enable Executive to convert Executive's
and his/her dependents' coverage under such policies to individual policies or
programs upon the same terms as employees of the Company may apply for such
conversions.
(c) If during the Termination Period the employment of Executive shall
terminate by reason of a Nonqualifying Termination, then the Company shall pay
to Executive within
<PAGE> 9
five (5) days following the Date of Termination a lump sum cash amount equal to
the sum of Executive's unpaid base salary from the Company through the Date of
Termination (at the rate in effect just prior to the time a Notice of
Termination is given) plus any bonus payments which have been earned or become
payable, to the extent not theretofore paid.
5. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment or distribution by the Company or
its affiliated companies to or for the benefit of Executive (whether paid or
payable or distributed or distributable pursuant to the terms of this Agreement
or otherwise, but determined without regard to any additional payments required
under this Section 5) (a "Payment") would be subject to the excise tax imposed
by Section 4999 of the Code, or any interest or penalties are incurred by
Executive with respect to such excise tax (such excise tax, together with any
such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then Executive shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by
Executive of all taxes (including any interest or penalties imposed with
respect to such taxes) including, without limitation, any income and employment
taxes (and any interest and penalties imposed with respect thereto) and Excise
Tax, imposed upon the Gross-Up Payment, Executive retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 5(c), all determinations
required to be made under this Section 5, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be made by the public
accounting firm that is retained by the Company as of the date immediately
prior to the Change in Control (the "Accounting Firm") which shall provide
detailed supporting calculations both to the Company and Executive within
fifteen (15) business days of the receipt of notice from Executive that there
has been a Payment, or such earlier time as is requested by the Company
(collectively, the "Determination"). In the event that the Accounting Firm is
serving as accountant or auditor for the individual, entity or group affecting
the Change in Control, Executive shall appoint another nationally recognized
public accounting firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm hereunder).
All fees and expenses of the Accounting Firm shall be borne solely by the
Company. Any Gross-Up Payment, as determined pursuant to this Section 5, shall
be paid by the Company to Executive within five (5) days of the receipt of the
Determination. If the Accounting Firm determines that no Excise Tax is payable
by Executive, it shall furnish Executive with a written opinion
<PAGE> 10
that failure to report the Excise Tax on Executive's applicable federal income
tax return would not result in the imposition of a negligence or similar
penalty. The Determination by the Accounting Firm shall be binding upon the
Company and Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the Determination, it is possible that
Gross-Up Payments which will not have been made by the Company should have been
made ("Underpayment"), consistent with the calculations required to be made
hereunder. In the event that the Company exhausts its remedies pursuant to
Section 5(c) and Executive thereafter is required to make payment of any Excise
Tax, the Accounting Firm shall determine the amount of the Underpayment that
has occurred and any such Underpayment shall be promptly paid by the Company to
or for the benefit of Executive.
(c) Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten (10) business days after Executive is
informed in writing of such claim and shall apprise the Company of the nature
of such claim and the date on which such claim is requested to be paid.
Executive shall not pay such claim prior to the expiration of the 30-day period
following the date on which Executive gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes with respect to
such claim is due). If the Company notifies Executive in writing prior to the
expiration of such period that it desires to contest such claim, Executive
shall:
(1) give the Company any information reasonably requested by the
Company relating to such claim,
(2) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim
by an attorney reasonably selected by the Company,
(3) cooperate with the Company in good faith in order effectively
to contest such claim, and
(4) permit the Company to participate in any proceeding relating
to such claim; provided, however, that the Company shall bear and pay directly
all costs and expenses (including additional interest and penalties) incurred
in connection with such contest and shall indemnify and hold Executive
harmless, on an after-tax basis, for any Excise Tax or income or employment tax
(including interest and penalties with respect thereto) imposed as a result of
such representation and payment of costs and expenses. Without limitation on
the foregoing provisions of this Section 5(c), the Company shall control all
proceedings taken in connection
<PAGE> 11
with such contest and, at its sole option, may pursue or forego any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
Executive to pay the tax claimed and sue for a refund or contest the claim in
any permissible manner, and Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided further, that if the Company directs Executive to pay such
claim and sue for a refund, the Company shall advance the amount of such
payment to Executive on an interest-free basis and shall indemnify and hold
Executive harmless, on an after-tax basis, from any Excise Tax or income or
employment tax (including interest or penalties with respect thereto) imposed
with respect to such advance or with respect to any imputed income with respect
to such advance; and provided further, that any extension of the statute of
limitations relating to payment of taxes for the taxable year of Executive with
respect to which such contested amount is claimed to be due is limited solely
to such contested amount. Furthermore, the Company's control of the contest
shall be limited to issues with respect to which a Gross-Up Payment would be
payable hereunder and Executive shall be entitled to settle or contest, as the
case may be, any other issue raised by the Internal Revenue Service or any
other taxing authority.
(d) If, after the receipt by Executive of an amount advanced by the
Company pursuant to Section 5(c), Executive becomes entitled to receive, and
receives, any refund with respect to such claim, Executive shall (subject to
the Company's complying with the requirements of Section 5(c) promptly pay to
the Company the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the receipt by
Executive of an amount advanced by the Company pursuant to Section 5(c), a
determination is made that Executive shall not be entitled to any refund with
respect to such claim and the Company does not notify Executive in writing of
its intent to contest such denial of refund prior to the expiration of thirty
(30) days after such determination, then such advance shall be forgiven and
shall not be required to be repaid and the amount of such advance shall offset,
to the extent thereof, the amount of Gross-Up Payment required to be paid.
6. Withholding Taxes. The Company may withhold from all payments due
to Executive (or his/her beneficiary or estate) hereunder all taxes which, by
applicable federal, state, local or other law, the Company is required to
withhold therefrom.
7. Reimbursement of Expenses. If any contest or dispute shall arise
under this Agreement involving termination of Executive's employment with the
Company or involving the failure or refusal of the Company to perform fully in
<PAGE> 12
accordance with the terms hereof, the Company shall reimburse Executive, on a
current basis, for all legal fees and expenses, if any, incurred by Executive
in connection with such contest or dispute regardless of the result thereof.
8. Scope of Agreement. Nothing in this Agreement shall be deemed to
entitled Executive to continued employment with the Company or its
subsidiaries.
9. Successors; Binding Agreement.
(a) This Agreement shall not be terminated by any merger or
consolidation of the Company whereby the Company is or is not the surviving or
resulting corporation or as a result of any transfer of all or substantially
all of the assets of the Company. In the event of any such merger,
consolidation or transfer of assets, the provisions of this Agreement shall be
binding upon the surviving or resulting corporation or the person or entity to
which such assets are transferred.
(b) The Company agrees that concurrently with any merger, consolidation
or transfer of assets referred to in paragraph (a) of this Section 9, it will
cause any successor or transferee unconditionally to assume, by written
instrument delivered to Executive (or his/her beneficiary or estate), all of
the obligations of the Company hereunder. Failure of the Company to obtain
such assumption prior to the effectiveness of any such merger, consolidation or
transfer of assets shall be a breach of this Agreement and shall constitute
Good Reason hereunder and shall entitle Executive to compensation and other
benefits from the Company in the same amount and on the same terms as Executive
would be entitled hereunder if Executive's employment were terminated following
a Change in Control other than by reason of a Nonqualifying Termination. For
purposes of implementing the foregoing, the date on which any such merger,
consolidation or transfer becomes effective shall be deemed the date Good
Reason occurs, and shall be the Date of Termination if requested by Executive.
(c) This Agreement shall inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If Executive shall die
while any amounts would be payable to Executive hereunder had Executive
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to such person or persons
appointed in writing by Executive to receive such amounts or, if no person is
so appointed, to Executive's estate.
10. Notice.
(a) For purposes of this Agreement, all notices and other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given when
<PAGE> 13
delivered or five (5) days after deposit in the United States mail, certified
and return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
name~
address~
If to the Company:
General Counsel
The Upjohn Company
7000 Portage Road
Kalamazoo, MI 49001
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
(b) A written notice (a "Notice of Termination") of Executive's Date of
Termination by the Company or Executive, as the case may be, to the other,
shall (i) indicate the specific termination provision in this Agreement relied
upon, (ii) to the extent applicable, set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated and (iii) specify the termination
date. The failure by Executive or the Company to set forth in such notice any
fact or circumstance which contributes to a showing of Good Reason or Cause
shall not waive any right of Executive or the Company hereunder or preclude
Executive or the Company from asserting such fact or circumstance in enforcing
Executive's or the Company's rights hereunder.
11. Full Settlement; Resolution of Disputes.
(a) The Company's obligation to make any payments provided for in this
Agreement and otherwise to perform its obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim,
right or action which the Company may have against Executive or others. In no
event shall Executive be obligated to seek other employment or take other
action by way of mitigation of the amounts payable to Executive under any of
the provisions of this Agreement and, such amounts shall not be reduced whether
or not Executive obtains other employment.
(b) If there shall be any dispute between the Company and Executive in
the event of any termination of Executive's employment then, until there is a
final, nonappealable, determination pursuant to arbitration declaring that such
termination was for Cause, that the determination by Executive
<PAGE> 14
of the existence of Good Reason was not made in good faith, or that the Company
is not otherwise obligated to pay any amount or provide any benefit to
Executive and his/her dependents or other beneficiaries, as the case may be,
under paragraphs (a) and (b) of Section 4, the Company shall pay all amounts,
and provide all benefits, to Executive and his/her dependents or other
beneficiaries, as the case may be, that the Company would be required to pay or
provide pursuant to paragraphs (a) and (b) of Section 4 as though such
termination were by the Company without Cause or by Executive with Good Reason;
provided, however, that the Company shall not be required to pay any disputed
amounts pursuant to this paragraph except upon receipt of an undertaking by or
on behalf of Executive to repay all such amounts to which Executive is
ultimately determined by the arbitrator not to be entitled.
12. Employment with Subsidiaries. Employment with the Company for
purposes of this Agreement shall include employment with any corporation or
other entity in which the Company has a direct or indirect ownership interest
of 50% or more of the total combined voting power of the then outstanding
securities of such corporation or other entity entitled to vote generally in
the election of directors.
13. Governing Law; Validity. The interpretation, construction and
performance of this Agreement shall be governed by and construed and enforced
in accordance with the internal laws of the State of Michigan without regard to
the principle of conflicts of laws. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which other provisions shall remain in
full force and effect.
14. Arbitration. Any dispute or controversy under this Agreement shall
be settled exclusively by arbitration in Kalamazoo, Michigan by three (3)
arbitrators in accordance with the rules of the American Arbitration
Association then in effect; provided, however, that Executive shall be entitled
to seek specific performance of his/her right to be paid pursuant to Section
11(b) during a dispute. Judgment may be entered on the arbitration award in
any court having jurisdiction. The Company shall bear all costs and expenses
arising in connection with any arbitration proceeding pursuant to this Section
14.
15. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original and all of which
together shall constitute one and the same instrument.
16. Miscellaneous. No provision of this Agreement may be modified or
waived unless such modification is agreed to in writing and signed by Executive
and by a duly authorized officer of the Company, or such waiver is signed by
the waiving party. No waiver by either party hereto at any time of any
<PAGE> 15
breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at
any prior or subsequent time. Failure by Executive or the Company or insist
upon strict compliance with any provision of this Agreement or to assert any
right Executive or the Company may have hereunder, including without
limitation, the right of Executive to terminate employment for Good Reason,
shall not be deemed to be a waiver of such provision or right or any other
provision or right of this Agreement. The rights of, and benefits payable to,
Executive, his/her estate or his/her beneficiaries pursuant to this Agreement
are in addition to any rights of, or benefits payable to, Executive, his/her
estate or his/her beneficiaries under any other employee benefit plan or
compensation program of the Company. This Agreement supersedes the Agreement
between Executive and the Company dated agt. date~, and such agreement shall be
of no further force or effect. No agreements or representations, oral or
otherwise, express or implied, with regard to the subject matter hereof have
been made by either party which are not expressly set forth in this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
by a duly authorized officer of the Company. Executive has executed this
Agreement as of the day and written below.
THE UPJOHN COMPANY
By:______________________________________
Agreed to this ______ day of March, 1995.
________________________________________
name~
<PAGE> 1
Exhibit (10)(N)
September 26, 1994
Dr. John L. Zabriskie
7000 Portage Road
Kalamazoo, MI 49001
Dear John:
The Compensation and Incentive Committee of the Board of Directors has approved
the changes in your compensation described below. Subject to your agreement,
this letter will amend and supplement the terms of your current employment
letter dated March 14, 1994.
1. Under your March 14, 1994 letter agreement, the 15,000 shares of
restricted Common Stock that you received in January 1994 are to be
reduced (based on the January 12, 1994 average market price of Upjohn
Common Stock) by the value of any performance share awards you receive
from Merck. The Compensation and Incentive Committee confirmed at their
July 19, 1994 meeting that this offset would be calculated by subtracting
the pre-tax value of the target amount of any performance share awards you
receive from Merck (or such lesser number of performance shares as you
actually receive). Accordingly, your restricted stock award has been
reduced, effective as of July 19, 1994, the date of the Compensation and
Incentive Committee meeting, by 4,798 shares, which was calculated as
follows:
(i) number of Upjohn restricted shares
you originally received 15,000
(ii) reduced by the pre-tax value of the
Merck performance share target award
that you received in 1994 (i.e., 4,557
Merck target shares x the $31.00
Merck stock price on award date
divided by the $29.44 Upjohn stock
price on January 12, 1994 = 4,798
shares) - 4,798
-------
10,202 restricted shares
of Upjohn stock
remaining
<PAGE> 2
Dr. John L. Zabriskie September 26, 1994
Page 118
2. Your remaining 10,202 restricted shares of Upjohn Common Stock will be
similarly reduced by the pre-tax value of the target amount of any future
performance share awards you receive from Merck (or such lesser amount as
you actually receive) and will remain restricted until May 1996 or such
earlier time (but not before January 12, 1996) that it is determined that
you will receive no further performance share awards from Merck.
3. You indicated that you did not wish to reduce the amount of your Upjohn
stock ownership and wanted to provide the Company with the equivalent
value in cash rather than forfeit the restricted shares. Accordingly, you
agree to pay Upjohn the value of 4,798 shares of Upjohn Common Stock based
on the average Upjohn stock price on the first day of the next period that
corporate officers are permitted to purchase Upjohn stock. The Company
will then issue to you a restricted stock certificate for 10,202 shares of
Upjohn Common Stock and a nonrestricted stock certificate for 4,798 shares
of Upjohn Common Stock.
4. You shall have a similar right to provide the Company with the equivalent
value in cash of the number of shares of Upjohn restricted stock that
would otherwise be forfeited as a result of any future Merck performance
share awards you may receive.
Very truly yours,
Richard G. Tomlinson
Senior Vice President for Human Resources
Agreed to and accepted by:
__________________________________
John L. Zabriskie
jmb
<PAGE> 1
EXHIBIT 11(a)
THE UPJOHN COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE - PRIMARY
(IN MILLIONS, EXCEPT PER-SHARE DATA)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1994 1993 1992
-------- ------- --------
<S> <C> <C> <C>
Earnings from continuing operations before
accounting changes $489.1 $396.4 $527.0
Earnings from discontinued operations, net 1.7 14.9 20.2
Cumulative effect of accounting changes, net of tax ( 18.9) (222.9)
------ ------ ------
Net earnings 490.8 392.4 324.3
Dividends on preferred stock, net of tax 12.3 12.1 12.1
------ ------ ------
Net earnings on common stock - primary $478.5 $380.3 $312.2
====== ====== ======
Average number of common shares outstanding 173.1 174.0 175.1
Number of common shares issuable assuming
exercise of stock options .2 .1 .5
Contingently issuable incentive shares .3 .3 .3
----- ----- -----
173.6 174.4 175.9
====== ====== ======
Earnings per share - primary
Continuing operations before accounting changes $2.75 $2.20 $2.92
Discontinued operations .01 .09 .12
Cumulative effect of accounting changes (.11) (1.26)
----- ----- -----
Net earnings $2.76 $2.18 $1.78
===== ===== =====
</TABLE>
<PAGE> 1
EXHIBIT 11(b)
THE UPJOHN COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE - FULLY DILUTED
(IN MILLIONS, EXCEPT PER-SHARE DATA)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Earnings from continuing operations before
accounting changes $489.1 $396.4 $527.0
Earnings from discontinued operations, net 1.7 14.9 20.2
Cumulative effect of accounting changes, net of tax (18.9) (222.9)
------ ------ ------
Net earnings $490.8 $392.4 $324.3
Less ESOP contribution assumed to be
required if preferred shares are
converted into common shares 4.7 4.7 5.2
Less adjustment of tax benefit on
allocated shares .4 .3 .2
------ ------ ------
Net earnings on common shares - fully
diluted $485.7 $387.4 $318.9
====== ====== ======
Average number of common shares
outstanding 173.1 174.0 175.1
Number of common shares issuable assuming
exercise of stock options .3 .1 .5
Contingently issuable incentive shares .3 .3 .3
Number of common shares issuable assuming
conversion of preferred shares 7.4 7.4 7.4
----- ----- -----
181.1 181.8 183.3
====== ====== ======
Earnings per share - fully diluted
Continuing operations before accounting changes $2.67 $2.15 $2.84
Discontinued operations .01 .08 .11
Cumulative effect of accounting changes (.10) (1.21)
----- ----- -----
Net earnings $2.68 $2.13 $1.74
===== ===== =====
</TABLE>
<PAGE> 1
EXHIBIT 12
THE UPJOHN COMPANY AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings from continuing operations before
accounting changes, income taxes and
minority equity $643,296 $480,037 $671,903 $693,767 $624,860
Less: Equity in undistributed net income
(loss) of companies owned less than 50%
2,264 3,119 2,212 1,455 1,742
-------- -------- -------- -------- --------
641,032 476,918 669,691 692,312 623,118
Add: Amortization of previously capitalized
interest 4,417 4,009 3,799 3,109 2,922
Fixed charges included in the above:
Interest and amortization of debt expense
51,496 58,381 58,155 46,851 53,502
Rental expense representative of an
interest factor 12,903 12,221 11,495 10,563 9,426
-------- -------- -------- -------- --------
Earnings from continuing operations before
accounting changes, income taxes, minority
equity and fixed charges $709,848 $551,529 $743,140 $752,835 $688,968
======== ======== ======== ======== ========
Interest incurred and amortization of debt
expense 63,599 74,080 69,163 59,920 61,146
Rental expense representative of an
interest factor 12,903 12,221 11,495 10,563 9,426
-------- -------- -------- -------- --------
Total fixed charges $76,502 $86,301 $80,658 $70,483 $70,572
======== ======== ======== ======== ========
Ratio of earnings to fixed charges 9.28 6.39 9.21 10.68 9.76
======== ======== ======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 13
THE UPJOHN COMPANY AND SUBSIDIARIES
Financial Section of the 1994 Annual Report to Shareholders
This exhibit contains the following:
Financial Review (Management's Discussion and Analysis of Financial
Condition and Results of Operations)
Selected Financial Information
Report of Management
Report of Independent Accountants
Consolidated Statements of Earnings - Years Ended December 31, 1994
and 1993
Consolidated Balance Sheets - December 31, 1994 and 1993
Consolidated Statements of Shareholders' Equity - Years Ended December
31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows - Years Ended December 31, 1994,
1993 and 1992
Consolidated Statements of Segment Operations - Years Ended December 31,
1994, 1993 and 1992
Notes to the Consolidated Financial Statements
Summary of Continuing Operations
Quarterly Data
<PAGE> 2
FINANCIAL REVIEW
Overview of Consolidated Results
Dollars in Millions, except per-share data
<TABLE>
<CAPTION>
1994 % Change 1993 % Change 1992
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenue $3,344.5 (1%) $3,380.5 3% $3,284.7
Operating income 599.4 30 459.5 (31) 662.7
Earnings from continuing
operations before income
taxes and minority equity 643.3 34 480.0 (29) 671.9
Earnings from continuing
operations 489.1 23 396.4 (25) 527.0
Net earnings 490.8 25 392.4 21 324.3
Net earnings per common share:
-Primary $2.76 27 $2.18 22 $1.78
-Fully diluted $2.68 26 $2.13 22 $1.74
-----------------------------------------------------------------------------------------------------------
</TABLE>
When comparing year-to-year earnings, accounting changes and restructurings
recorded in each of the prior two years should be considered. In 1993, the
company made two accounting changes: the adoption of calendar-year reporting
for subsidiaries formerly reporting on a fiscal year and the adoption of
Statement of Financial Accounting Standards (SFAS) No. 112 relating to
postemployment benefits. The cumulative effect of these changes reduced 1993
net earnings by $18.9 million ($.11 per share). In 1992, the company adopted
SFAS No. 106 relating to postretirement benefit costs other than pensions and
SFAS No. 109 relating to accounting for income taxes. The cumulative effect of
these accounting changes reduced net earnings by $223 million ($1.26 per share)
(see Note D).
In 1993, the company recorded restructuring charges, that reduced operating
income by $209 million ($155 million, or $.89 per share after tax), primarily
associated with a worldwide work-force reduction, the write-down of certain
assets and the reduction of excess manufacturing capacity. In 1992,
restructuring charges of $22 million ($13.4 million, or $.08 per share after
tax) were made to reflect the cost of a special voluntary early retirement
program (see Note C).
Several actions were taken to increase the company's focus on its core
pharmaceutical business, including the 1994 divestitures of the Asgrow Seed
Company and the company's interest in a chicken-breeding joint venture and the
1993 divestiture of Asgrow Florida Company. Both the sales of the Asgrow Seed
Company and Asgrow Florida Company have been reported as discontinued
operations. Accordingly, certain prior-period financial data have been
restated to reflect only the continuing operations of the company (see Note B).
With the sale of the three agricultural segment operations identified above,
the company has elected to report its business operations as a single industry
segment - Pharmaceutical Products. This industry designation more accurately
reflects the ongoing operations of the company. Prior-year data presented in
this review also reflect the single Pharmaceutical Products industry segment.
PRODUCT SALES
The table below provides a year-to-year comparison of consolidated net sales
by major pharmaceutical product group(1):
<TABLE>
<CAPTION>
Dollars in millions 1994 % Change 1993 % Change 1992
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Central nervous system $ 455.3 (39%) $ 749.7 (4%) $ 783.3
Steroids, anti-inflammatory
and analgesic 413.4 2 406.5 (4) 422.1
Reproductive and women's
health 511.1 41 362.5 24 292.6
Critical care, transplant
and cancer 412.1 8 383.1 11 344.3
Infectious disease 439.0 11 394.0 14 346.4
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C> <C> <C> <C>
Animal health 336.2 1 332.6 4 320.7
Other products and
materials 707.9 (1) 711.6 (5) 746.8
---------------------------------------------------------------------------------------------------------------
Consolidated net sales $3,275.0 (2) $3,340.0 3 $3,256.2
-----------------------------------------------------------------------------------------------------------
</TABLE>
(1)Prior-year data have been conformed to current year product group
classifications.
Consolidated domestic sales of pharmaceutical products in 1994 decreased 10
percent to $1,847 million from $2,046 million in 1993, and compared to $2,003
million in 1992. Domestic sales in 1994 were 56 percent of total consolidated
sales, down from 61 and 62 percent in 1993 and 1992, respectively.
International sales in 1994 were $1,428 million, up 10 percent from $1,294
million in 1993 and compared to $1,253 million in 1992. Consolidated sales for
1994 were down as the result of a 3 percent decline in price, offset in part by
a 1 percent benefit from foreign exchange. Volume was unchanged.
The current year decline in worldwide sales of central nervous system agents
was the result of intense generic competition against XANAX, the anti-anxiety
agent, which lost U.S. patent protection in October 1993. The U.S. decline in
sales of XANAX was offset somewhat by sales of the company's generic
anti-anxiety agent alprazolam. In international markets, XANAX continued to
record good growth. Sales of HALCION Tablets (triazolam), the sleep inducing
agents, were also down in the U.S. largely due to the loss of U.S. patent
protection in October 1993. Sales of HALCION in international markets were up
in 1994, reversing the trend of decline encountered over the past few years.
The decline in sales of central nervous system agents is expected to continue
in 1995. The 1993 decrease from 1992 sales levels also resulted from the loss
of U.S. patent protection, offset somewhat by the launch of generic versions
of XANAX and HALCION.
The 1994 growth in the steroid, anti-inflammatory and analgesic product group
was led by MOTRIN IB, the over-the-counter nonsteroidal analgesic agent, which
continued to perform well in a very competitive market. This performance
resulted in part from a 1993 agreement that provided access to new-product
technology and product-line extensions. This and other product sales gains
offset the decline in U.S. sales of ANSAID Tablets (flurbiprofen), which
resulted from generic competition encountered in late 1994. U.S. patent
protection for ANSAID was lost in February 1993.
Sales of reproductive and women's health products recorded strong growth
benefiting from the addition of OGEN, the estrogen replacement therapy acquired
in late 1993. Sales of DEPO-PROVERA, the injectable contraceptive, continued
to record strong increases in both U.S. and international markets. Combined
worldwide sales of PROVERA Products (medroxyprogesterone), the progestational
agents, were up for the year in spite of a moderate decline in the U.S. due to
increasing generic competition. CAVERJECT for erectile dysfunction, was
approved for sale in 12 countries in 1994 and also contributed to sales.
International sales of SOLU-MEDROL, the injectable steroid, and other MEDROL
Products led the growth in the critical care, transplant and cancer product
group. Sales of ATGAM, the immunosuppressant, were up slightly for the year.
In 1994, the company completed a series of agreements with Yakult Honsha Co.
Ltd. for the rights to develop and market the anti-cancer compound irinotecan
for several indications in the U.S., Canada, and Latin America. Clinical
development of this compound is currently in process.
VANTIN, the broad-spectrum oral antibiotic sold primarily in the U.S., led the
growth in the infectious disease product group. Sales of CLEOCIN (DALACIN in
international markets), the family of antibiotic products, demonstrated good
growth in international markets but declined in the U.S. Sales of CLEOCIN T
Products (clindamycin topical) were down for the year due to U.S. generic
competition.
In the animal health product group, PIRSUE, introduced late in 1993 for the
treatment of mastitis, and LUTALYSE, the fertility-control agent, both provided
1994 sales growth. Sales of MGA, the feed additive, were flat. Sales of
NAXCEL (EXCENEL in international markets), the antibiotic, were up in
<PAGE> 4
international markets and down slightly in the U.S. due to a lower-than-average
cattle population. Sales of lincomycin and companion animal products were down
in 1994.
In the other products and materials category, GLYNASE PresTab, the oral
anti-diabetes agent, continued to record good growth in the U.S. Sales of
MICRONASE Tables (glyburide), the oral anti-diabetes agents, were down
significantly from 1993 levels as a result of the loss of U.S. market
exclusivity in the second quarter of 1994. While the company will continue to
sell its generic glyburide to minimize the effect of third-party generic
competition, it is anticipated that combined sales of MICRONASE and glyburide
will decline in 1995. Sales of ROGAINE, the treatment for hair loss, were up
for the year. The consumer products CORTAID, the anti-itch medication; DOXIDAN
and SURFAK, the treatments for constipation; and DRAMAMINE, the treatment for
motion sickness, all demonstrated good growth, while sales of KAOPECTATE, the
treatment for diarrhea, were down for the year.
OTHER OPERATING REVENUE
Operating income for 1994 benefited from marketing alliance agreements with
Burroughs-Wellcome Co. for the promotion of their product ZOVIRAX, and with
Hoechst-Roussel Pharmaceuticals Inc. (HRPI) to market and detail their product
ALTACE. The agreement with Burroughs-Wellcome expires at the end of 1995. An
agreement has been reached with HRPI to sell the company's rights relating to
ALTACE effective January 1, 1995.
COSTS AND EXPENSES
Consolidated operating expenses, stated as a percent of sales, were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost of products sold 25.7% 23.5% 23.2%
Research and development 18.5 18.3 17.0
Marketing and administrative 39.5 39.4 39.7
Restructuring 6.3 0.7
Operating income 18.3 13.8 20.4
----------------------------------------------------------------------------------------------------------
</TABLE>
The rise in 1994 cost of products sold compared to that of the prior two years
is the result of a change in product mix, which is primarily due to U.S.
generic competition encountered with the major products identified previously.
Compared to the products that lost patent protection, the company's generic
equivalents and other products have lower gross margins. The decline is also
due to a higher percentage of total worldwide pharmaceutical product sales in
international markets where the company's products generally carry lower gross
margins.
Expenditures for research and development in 1994 were up slightly as a percent
of sales from 1993 due primarily to the timing of expenses related to large
clinical programs. Both 1994 and 1993 research and development expenditures
are significantly higher than in 1992 due to the continuing costs associated
with accelerated development of FREEDOX IV Solution (tirilazad mesylate) and
other compounds.
In December 1994, further enrollment in the North American clinical trial of
FREEDOX for severe to moderate head injury was suspended pending further
analysis of an unexplained difference in mortality rates. At the time of
suspension, enrollment in this trial was 98 percent complete. The results were
unexpected because a fully-enrolled study in Europe showed no signs of the
effects encountered in the North American trial. The company will continue to
medically evaluate patients in both the North American and European trials for
six months following treatment. The data from both trials will be analyzed to
assess the therapeutic benefit of FREEDOX in the treatment of severe to
moderate head injury and to determine the reason for the difference in
mortality encountered in the North American trial. Analysis of the results of
other clinical trials of FREEDOX for subarachnoid hemorrhage, spinal cord
injury and stroke has not identified any safety concerns and these trials will
continue.
<PAGE> 5
Marketing and administrative expense as a percent of sales in 1994 was
comparable to both 1993 and 1992. Savings from the 1993 and 1992
restructurings realized in this expense category were offset by increases in
other costs related to various marketing programs and by other expenses. A
portion of the increased cost in 1994 resulted from new-product marketing
expenses related to LUVOX, the treatment for obsessive-compulsive disorder,
which will be sold in the U.S. LUVOX is a product of Solvay Pharmaceuticals
Inc. Unfavorable foreign exchange comparisons in certain international markets
also added to this expense category in 1994.
The restructuring plan announced in October 1993 was in the process of being
implemented during 1994. At the beginning of 1994, approximately 400 employees
had left the company under the 1993 restructuring, while at the end of 1994
that number had increased to approximately 1,100 (see Note C). Certain
elements of the 1993 plan are still in the process of implementation. All
aspects of the 1992 plan had been implemented by the end of 1993. The gross
combined benefit to 1995 earnings from the 1992 and 1993 restructurings is
expected to be approximately $120 million. The benefit is expected to increase
moderately after 1995 when all aspects of the 1993 restructuring plan are fully
implemented.
Earnings before taxes and minority equity from the company's operations in
Europe of $44 million were up significantly in 1994 from a loss of $39 million
and earnings of $11 million in 1993 and 1992, respectively. This improvement
is the result of increased sales volume, a net favorable effect from exchange
and savings from expense reductions. The 1993 European measure was depressed
largely due to unfavorable exchange and the costs of restructuring. Sales
increased in Japan largely as the result of favorable exchange, which was
partially offset by continuing price erosion in that market. Restructuring did
not have a significant adverse effect on earnings in the Japan and Pacific
geographic area in 1993. In other international markets, increases in sales
volume, which were offset somewhat by exchange, and expense savings led to the
significant increase in earnings before taxes from 1993 levels. The costs of
restructuring reduced earnings in other international markets in 1993 (see Note
U).
NONOPERATING INCOME AND EXPENSE
The favorable interest income to interest expense relationships have increased
in each of the years 1992 through 1994. Nonoperating income in 1994 also
benefited from the favorable resolution of a coverage dispute with an insurance
carrier and the gain on the sale of a joint venture. The 1993 measure includes
a nonoperating gain on the sale of a cough/cold medicine trademark. There were
no such gains in 1992.
INCOME TAXES
The effective tax rate for 1994 was 24 percent, compared to 17.5 percent and
21.7 percent in 1993 and 1992, respectively. When the tax benefits related to
restructuring are excluded, the 1993 rate would have been 22 percent. The
increase in 1994 is the result of a higher proportion of earnings from
international operations, which are taxed at relatively higher rates, and a
lower proportion of total earnings from operations in Puerto Rico. The major
products encountering U.S. generic competition are manufactured in Puerto Rico.
The Omnibus Budget Reconciliation Act of 1993 will have a significant impact on
the company's net earnings beginning in 1995. The Act ultimately reduces tax
benefits from operations in Puerto Rico under Section 936 of the Internal
Revenue Code by 60 percent. The change had little effect on the tax rate for
1994.
SFAS No. 109 was adopted effective January 1, 1992. The cumulative effect of
this accounting change was a favorable adjustment to 1992 net earnings of $13
million, resulting primarily from adjusting deferred tax balances to reflect
current tax rates.
FINANCIAL CONDITION
<PAGE> 6
<TABLE>
<CAPTION>
1994 1993 1992
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Working capital (millions) $1,011 $678 $582
Current ratio 1.9 1.7 1.5
Debt to total capitalization 26.0% 28.1% 30.3%
Return on average equity - continuing
operations before accounting changes 21.9% 19.3% 26.2%
------------------------------------------------------------------------------------------------------------
</TABLE>
The significant increase in working capital and the corresponding improvement
in the current ratio were largely the result of the year-end 1994 receipt of
the proceeds from the sale of the Asgrow Seed Company which were temporarily
invested in cash equivalents. Also contributing to the improvement in these
measures was the increase in short-term investments, which were classified on
the balance sheet as other current assets. The company recently announced a
common stock repurchase program, to be completed in 1995, which will utilize
approximately $300 million. The working capital increase and improvement in
the current ratio realized at the end of 1993 was because the proceeds of
medium-term notes had been used during that year to reduce outstanding
commercial paper.
The 1994 ratio of debt to total capitalization benefited from the increase in
total shareholders' equity when compared to a consistent level of year-to-year
total borrowing. The improvement in 1993, when compared to 1992, resulted from
lower total debt.
The 1994 improvement in return on average equity before accounting changes was
due to the favorable earnings comparison. Net earnings in 1993 and 1992 were
reduced by the after-tax expense associated with restructuring, totaling $154.6
and $13.4 million, respectively. Excluding the cost of the restructurings,
return on average equity would have been 27.5 percent in 1993 and 27.9 percent
in 1992.
Net cash provided by operations was $710 million in 1994 compared to $780
million and $597 million in 1993 and 1992, respectively. Significant
adjustments were made to 1993 cash provided by net earnings to reflect the
non-cash effects of restructuring charges. Spending against the related
restructuring reserves reduced the 1994 measure by $72 million. This spending
was primarily the result of the reduction in personnel and is expected to be
less than $35 million in 1995. Cash provided by 1992 net earnings was adjusted
to reflect the non-cash effects of a restructuring and a significant accounting
change. Nonoperating uses of cash in 1994 included purchase of investments;
the addition of property, plant and equipment; the payment of dividends to
shareholders; and the purchase of treasury stock. The largest source of cash
from nonoperating activities was realized from the sale of the Asgrow Seed
Company.
In 1993, proceeds of a $200 million 5.875% debt issue under a 1993 shelf
registration were utilized to redeem $200 million 8% notes that were called at
par on July 1, 1993. Medium-term borrowing at the end of 1994 was unchanged
from 1993 at $466 million and compared to $138 million in 1992. The company
had $134 million available for future borrowing under the 1993 and 1991 shelf
registrations at the end of 1994 (see Note I).
The company utilizes derivative financial instruments in conjunction with its
foreign currency risk management programs. These programs employ
over-the-counter forward exchange contracts and purchased foreign currency
options to hedge existing net transaction exposures and certain existing
obligations in several subsidiary locations. These exposures arise both from
intercompany and third-party transactions. Foreign currency options are
occasionally utilized to hedge anticipated transactions. Risk of loss in the
hedging of anticipated transactions is minimized through the exclusive use of
purchased foreign currency options.
The hedging activities seek to protect operating results and cash flows from
the potential adverse effects of foreign currency fluctuations. This is done
by offsetting the gains or losses on the underlying exposures with losses and
gains on the instruments utilized to create the hedge. The company does not
utilize derivative financial instruments for trading purposes.
<PAGE> 7
The company is obligated to make contributions to certain employee benefit
programs and may elect to continue funding one other program. The company's
cash flow requirements under the Employee Stock Ownership Plan will begin to
accelerate in 1996 from current levels (see Notes I and P), and there will be a
minimum contribution required for the U.S. pension plan of approximately $25
million. In each of the years 1992 through 1994, the company has made
contributions to a Voluntary Employee Benefit Association to partially prefund
postretirement benefit obligations. Future contributions are discretionary.
As indicated in Note J, the company has committed to make a series of
investments in a company that intends to manufacture a hemoglobin-based oxygen
carrier as certain progress goals are met.
The company's future cash provided by operations and borrowing capacity are
expected to cover normal cash flow needs and planned capital additions for the
foreseeable future, despite the adverse effects of the expiration of patents
and other product protection discussed below.
PATENT EXPIRATIONS
A U.S. Food and Drug Administration (FDA) moratorium on the approval of
Abbreviated New Drug Applications (ANDAs) for products containing glyburide,
the generic name for MICRONASE, expired in May 1994. Patent protection of
ANSAID, CLEOCIN T, XANAX, and HALCION expired in 1993. No significant patent
protection remains on PROVERA. The company began marketing generic equivalents
for most of these products in 1993 and 1994. U.S. sales of these six products,
including that of the generic equivalents, declined from $1,068 million in 1993
to $672 million in 1994. While it is anticipated that sales of these products
will continue to decrease over the next several years, the decline is expected
to be lower than that experienced in 1994.
FDA moratoriums on the approval of ANDAs protect exclusivity for GLYNASE until
March 1995 and for DEPO-PROVERA until November 1995. U.S. patent protection
for ROGAINE will expire in February 1996.
Sales growth of other existing products, the acquisition and development of new
products, the marketing of generic equivalents, and efforts to control costs
and enhance revenues are expected to offset much of the effects of the loss of
patent and ANDA protection. Therefore, the combined earnings impact of the
patent expirations, offset by these strategies and actions, are not expected to
be as severe in 1995 as in 1994. Earnings in years subsequent to 1995 depend
on the success of new products and the strategies noted above.
OTHER ITEMS
The company is subject to environmental legislation and regulation.
Environmental compliance costs, including capital expenditures related to
future production, have been increasing each year. Spending at the Kalamazoo,
Mich., production site is expected in the near future related to groundwater
remediation and improved control of surface water discharges. Other projects
related to the prevention, mitigation and elimination of environmental effects
are being planned and implemented worldwide.
The company is involved in several administrative and judicial proceedings
relating to environmental matters, including actions brought by the U.S.
Environmental Protection Agency (EPA) and state environmental agencies for
cleanup at approximately 40 "Superfund" or comparable sites, including the West
KL Avenue Landfill in Kalamazoo County, Mich. The company's estimate of the
ultimate cost to be incurred in connection with these environmental situations
could change due to the potential existence of joint and several liability,
possible recovery from other potentially responsible parties, the levels of
cleanup to be required and the technologies to be employed. An accrual has
been recorded, but added costs could be incurred in connection with the various
remedial actions. Although the company cannot predict the outcome of these
matters, the ultimate liability should not have a material effect on the
company's consolidated financial position; and unless there is a significant
deviation from the historical pattern of resolution of such issues, the
ultimate liability should not have a material adverse effect on
<PAGE> 8
the company's results of operations or liquidity.
Studies directed toward a final remediation plan for the site of the company's
discontinued industrial chemical operations in North Haven, Conn., are in
process. Issues related to removal of a sludge pile located on the site due to
zoning violations have been resolved with the town. The final plan of
remediation of the pile will be worked out among the company, the Connecticut
Department of Environmental Protection and the U.S. EPA with input from the
public. The company cannot at the present time predict the final resolution of
the sludge pile issue and has not established any reserves for the cost of
off-site disposal. The company believes that it has established sufficient
reserves to cover the costs of other remedial activities that may be required.
Dollar amounts in millions, except per-share data
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
--------------------------------------------------------------------------------------------------------------------
Years Ended December 31 1994 1993 1992 1991 1990
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenue $3,344.5 $3,380.5 $3,284.7 $3,057.9 $2,675.3
Earnings from continuing operations
before cumulative effect of
accounting changes(a) 489.1 396.4 527.0 521.5 435.9
Earnings per share from continuing
operations before cumulative effect
of accounting changes(a) 2.75 2.20 2.92 2.87 2.36
Dividends declared per share 1.48 1.48 1.42 1.26 1.04
Total assets 5,162.5 4,811.9 4,513.1 4,053.9 3,578.8
Long-term debt 521.0 526.8 402.9 295.5 274.6
--------------------------------------------------------------------------------------------------------------------
</TABLE>
(a)Refer to Note D relating to January 1, 1993 accounting changes resulting in
a net charge of $18.9 or $.11 per share and to January 1, 1992 accounting
changes resulting in a net charge of $222.9 or $1.26 per share.
<PAGE> 9
REPORTS OF MANAGEMENT AND INDEPENDENT ACCOUNTANTS
REPORT OF MANAGEMENT
The consolidated financial statements presented in this annual report have been
prepared by the company in conformity with generally accepted accounting
principles. The management of The Upjohn Company is responsible for all
information and representations made in this report and for the integrity and
objectivity of the financial statements. The statements include informed
judgments and estimates necessary for their preparation.
The company maintains systems of internal controls over financial reporting
that provide reasonable assurance that assets are safeguarded from unauthorized
use or disposition, that transactions are properly recorded and that financial
statements conform in all material respects with generally accepted accounting
principles. Systems, financial policies, and procedures related to internal
controls over financial reporting are documented and communicated to employees
responsible for accounting and reporting activities. The systems are
continually reviewed and modified, where appropriate.
Internal auditors, using audit programs designed to determine compliance with
financial policies and procedures and the systems of internal controls over
financial reporting, independently monitor the effectiveness of the company's
application of these control systems. Their findings are reported to operating
management for resolution as needed.
The selection of the company's independent accountants, Coopers & Lybrand,
L.L.P., has been approved by the Board of Directors. The examination of the
company's consolidated financial statements by the independent accountants is
made in accordance with generally accepted auditing standards and is
coordinated with the company's program of internal audit.
An audit committee of the Board of Directors, composed solely of directors who
are not employees of the company, oversees the company's financial reporting
process. The committee meets with and reviews the activities of corporate
financial management, internal auditors, and independent accountants to
ascertain that each is properly discharging its responsibilities. The
independent accountants and internal auditors have access to the audit
committee to discuss the results of their work, the adequacy of internal
controls over financial reporting and the quality of financial reporting.
John L. Zabriskie, Ph.D.
Chairman of the Board
and Chief Executive Officer
Robert C. Salisbury
Executive Vice President
and Chief Financial Officer
<PAGE> 10
REPORT OF INDEPENDENT ACCOUNTANTS
To The Shareholders and Board of Directors
The Upjohn Company
We have audited the consolidated balance sheets of The Upjohn Company and
Subsidiaries as of December 31, 1994 and 1993, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for the years
1994, 1993 and 1992. These financial statements are the responsibility of The
Upjohn Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above (pages
30 to 45) present fairly, in all material respects, the consolidated financial
position of The Upjohn Company and Subsidiaries as of December 31, 1994 and
1993, and the consolidated results of their operations and their cash flows for
the years 1994, 1993 and 1992, in conformity with generally accepted accounting
principles.
As discussed in Notes D and T to the consolidated financial statements, the
company changed its practice of reporting certain majority-owned subsidiaries
from a fiscal year ending November 30 to a calendar year ending December 31 and
its method of accounting for postemployment benefits during 1993. As discussed
in Note D in 1992, the company changed its method of accounting for income
taxes and other postretirement benefits.
Coopers & Lybrand, L.L.P.
Chicago, Illinois
January 26, 1995
<PAGE> 11
CONSOLIDATED STATEMENTS OF EARNINGS
The Upjohn Company and Subsidiaries
<TABLE>
<CAPTION>
Dollar amounts in thousands, except per-share data
------------------------------------------------------------------------------------------------------------------
For the years ended December 31 1994 1993 1992
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUE:
Net sales $3,274,996 $3,339,957 $3,256,188
Other revenue 69,542 40,579 28,560
------------------------------------------------------------------------------------------------------------------
Total 3,344,538 3,380,536 3,284,748
------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of products sold 843,152 783,590 754,483
Research and development 607,187 612,490 553,297
Marketing and administrative 1,294,752 1,316,138 1,292,204
Restructuring 208,789 22,055
------------------------------------------------------------------------------------------------------------------
Total 2,745,091 2,921,007 2,622,039
------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 599,447 459,529 662,709
Interest income 59,624 50,789 50,054
Interest expense (24,600) (31,496) (31,253)
Foreign exchange losses (1,087) (4,556) (3,397)
All other, net 9,912 5,771 (6,210)
------------------------------------------------------------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND MINORITY EQUITY 643,296 480,037 671,903
Provision for income taxes 154,400 84,201 145,900
Minority equity in losses (192) (535) (987)
------------------------------------------------------------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS 489,088 396,371 526,990
------------------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS:
Earnings from operations (net of tax) 2,672 10,006 20,227
(Loss) gain on disposal of discontinued
operations (net of tax) (997) 4,926
------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGES 490,763 411,303 547,217
------------------------------------------------------------------------------------------------------------------
CUMULATIVE EFFECT OF ACCOUNTING CHANGES
(NET OF TAX) (18,906) (222,895)
------------------------------------------------------------------------------------------------------------------
NET EARNINGS 490,763 392,397 324,322
Dividends on preferred stock (net of tax) 12,291 12,125 12,084
------------------------------------------------------------------------------------------------------------------
Net earnings on common stock $ 478,472 $ 380,272 $ 312,238
------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE:
Primary
- Earnings from continuing operations
before accounting changes $2.75 $2.20 $2.92
- Discontinued operations .01 .09 .12
- Cumulative effect of accounting changes (.11) (1.26)
------------------------------------------------------------------------------------------------------------------
- Net earnings $2.76 $2.18 $1.78
------------------------------------------------------------------------------------------------------------------
Fully diluted
- Earnings from continuing operations
before accounting changes $2.67 $2.15 $2.84
- Discontinued operations .01 .08 .11
- Cumulative effect of accounting changes (.10) (1.21)
------------------------------------------------------------------------------------------------------------------
- Net earnings $2.68 $2.13 $1.74
------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 12
CONSOLIDATED BALANCE SHEETS
The Upjohn Company and Subsidiaries
<TABLE>
<CAPTION>
Dollar amounts in thousands
------------------------------------------------------------------------------------------------------------------
December 31 1994 1993
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 502,346 $ 281,132
Trade accounts receivable, less allowance of $36,088
(1993: $40,902) 650,522 653,543
Inventories 458,676 412,626
Deferred income taxes 151,783 161,569
Other 367,111 162,746
------------------------------------------------------------------------------------------------------------------
Total current assets 2,130,438 1,671,616
------------------------------------------------------------------------------------------------------------------
NET ASSETS OF DISCONTINUED OPERATIONS 278,344
------------------------------------------------------------------------------------------------------------------
INVESTMENTS 647,092 634,431
------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT AT COST:
Land 45,955 42,974
Buildings and leasehold improvements 1,230,926 1,100,715
Equipment 1,526,620 1,369,342
Construction in process 276,036 328,972
------------------------------------------------------------------------------------------------------------------
3,079,537 2,842,003
Less allowance for depreciation 1,280,866 1,141,127
------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 1,798,671 1,700,876
------------------------------------------------------------------------------------------------------------------
OTHER NONCURRENT ASSETS 586,260 526,654
------------------------------------------------------------------------------------------------------------------
Total assets $5,162,461 $4,811,921
------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Short-term debt, including current maturities of
long-term debt $ 42,090 $ 35,628
Accounts payable 179,802 122,220
Compensation and vacation 110,699 78,155
Dividends payable 64,060 64,170
Income taxes payable 189,015 176,356
Other 533,274 516,594
------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,118,940 993,123
------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 520,977 526,837
------------------------------------------------------------------------------------------------------------------
GUARANTEE OF ESOP DEBT 274,800 275,000
------------------------------------------------------------------------------------------------------------------
POSTRETIREMENT BENEFIT COST 369,217 382,123
------------------------------------------------------------------------------------------------------------------
OTHER NONCURRENT LIABILITIES 391,654 404,950
------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES 99,238 91,624
------------------------------------------------------------------------------------------------------------------
MINORITY EQUITY IN SUBSIDIARIES 5,017 52,614
------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock, one dollar par value; authorized
12,000,000 shares, issued Series B convertible 7,322
shares at stated value (1993: 7,379 shares) 295,079 297,387
Common stock, one dollar par value; authorized
600,000,000 shares, issued 190,589,607 shares 190,590 190,590
Capital in excess of par value 64,636 66,406
Retained earnings 2,757,260 2,535,010
Note receivable from ESOP Trust (ESOT) (33,520) (31,548)
ESOP deferred compensation (243,962) (251,301)
Currency translation adjustments (33,057) (114,198)
Treasury stock at cost, 17,447,880 shares
(1993: 17,157,689 shares) (614,408) (606,696)
------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 2,382,618 2,085,650
------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $5,162,461 $4,811,921
------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 13
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
The Upjohn Company and Subsidiaries
<TABLE>
<CAPTION>
Dollar amounts in thousands
------------------------------------------------------------------------------------------------------------------
For the years ended December 31 1994 1993 1992
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK:
Balance at beginning of year $ 297,387 $ 298,224 $ 299,523
Redemptions and conversions (2,308) (837) (1,299)
------------------------------------------------------------------------------------------------------------------
Balance at end of year 295,079 297,387 298,224
------------------------------------------------------------------------------------------------------------------
COMMON STOCK:
Balance at beginning of year 190,590 190,590 190,592
Stock option, incentive and dividend
reinvestment plans (2)
------------------------------------------------------------------------------------------------------------------
Balance at end of year 190,590 190,590 190,590
------------------------------------------------------------------------------------------------------------------
CAPITAL IN EXCESS OF PAR VALUE:
Balance at beginning of year 66,406 66,668 68,400
Stock option, incentive and dividend
reinvestment plans (1,770) (262) (1,732)
------------------------------------------------------------------------------------------------------------------
Balance at end of year 64,636 66,406 66,668
------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 2,535,010 2,412,028 2,348,318
Net earnings 490,763 392,397 324,322
Cash dividends declared (256,222) (257,290) (248,528)
Dividends on preferred stock (net of tax) (12,291) (12,125) (12,084)
------------------------------------------------------------------------------------------------------------------
Balance at end of year 2,757,260 2,535,010 2,412,028
------------------------------------------------------------------------------------------------------------------
NOTE RECEIVABLE FROM ESOP TRUST (ESOT):
Balance at beginning of year (31,548) (29,697) (27,946)
Rollover of accumulated interest (1,972) (1,851) (1,751)
------------------------------------------------------------------------------------------------------------------
Balance at end of year (33,520) (31,548) (29,697)
------------------------------------------------------------------------------------------------------------------
ESOP DEFERRED COMPENSATION:
Balance at beginning of year (251,301) (258,254) (263,230)
ESOP expense recognized in excess of cash
contributions 7,339 6,953 4,976
------------------------------------------------------------------------------------------------------------------
Balance at end of year (243,962) (251,301) (258,254)
------------------------------------------------------------------------------------------------------------------
CURRENCY TRANSLATION ADJUSTMENTS:
Balance at beginning of year (114,198) (89,145) (57,323)
Translation adjustments 81,141 (25,053) (31,823)
Income taxes 1
------------------------------------------------------------------------------------------------------------------
Balance at end of year (33,057) (114,198) (89,145)
------------------------------------------------------------------------------------------------------------------
TREASURY STOCK:
Balance at beginning of year (606,696) (574,871) (553,182)
Stock option, incentive and dividend
reinvestment plans 24,133 22,264 27,498
Purchases of treasury stock (31,845) (54,089) (49,187)
------------------------------------------------------------------------------------------------------------------
Balance at end of year (614,408) (606,696) (574,871)
------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $2,382,618 $2,085,650 $2,015,543
------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 14
CONSOLIDATED STATEMENTS OF CASH FLOWS
The Upjohn Company and Subsidiaries
<TABLE>
<CAPTION>
Dollar amounts in thousands
------------------------------------------------------------------------------------------------------------------
For the years ended December 31 1994 1993 1992
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net earnings $490,763 $392,397 $324,322
Adjustments to reconcile net earnings to net
cash provided (required) by operations:
Depreciation 163,370 162,559 152,596
Amortization of intangibles 11,795 10,941 12,985
Deferred income taxes 23,179 (82,407) 23,001
Restructuring 216,000 23,956
Cumulative effect of accounting changes
(net of tax) 18,906 222,895
Other (15,825) 4,609 (15,312)
Changes in:
Accounts receivable 6,263 31,167 (100,035)
Inventory (20,808) (53,344) (28,382)
Payables and accruals 63,176 (52,007) 9,779
Income taxes payable 11,417 1,279 (69,032)
Other current and noncurrent assets (38,274) 36,613 (13,884)
Other current and noncurrent liabilities 15,086 93,717 54,180
------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 710,142 780,430 597,069
------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED (REQUIRED) BY INVESTMENT
ACTIVITIES:
Property, plant and equipment additions (252,224) (323,510) (295,399)
Proceeds from sale of property, plant and
equipment 28,188 17,732 5,956
Proceeds from sale of investments 282,608 184,154 226,824
Purchase of investments (569,219) (249,664) (436,910)
Proceeds from the sale of discontinued
operations 307,843 31,000
Other (1,061) (1,079) 3,187
------------------------------------------------------------------------------------------------------------------
Net cash required by investment activities (203,865) (341,367) (496,342)
------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED (REQUIRED) BY FINANCING
ACTIVITIES:
Proceeds from issuance of debt 14,946 340,166 121,867
Repayment of debt (45,924) (215,720) (16,247)
Debt maturing in three months or less 4,475 (191,238) 133,333
Dividends paid to shareholders (263,661) (265,337) (252,028)
Purchase of treasury stock (31,845) (54,089) (49,187)
Other 12,425 8,984 15,394
------------------------------------------------------------------------------------------------------------------
Net cash required by financing activities (309,584) (377,234) (46,868)
------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 24,521 (9,592) (2,464)
------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 221,214 52,237 51,395
Cash and cash equivalents, beginning of year 281,132 226,359 168,610
------------------------------------------------------------------------------------------------------------------
Net cash of discontinued operations 2,536 6,354
------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $502,346 $281,132 $226,359
------------------------------------------------------------------------------------------------------------------
CASH PAID DURING THE YEAR FOR:
Interest (net of capitalized) $ 29,525 $ 34,599 $ 44,219
Income taxes $127,239 $154,984 $124,249
------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands, except per-share data
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the company and all majority-owned subsidiaries. Effective January
1, 1993, the subsidiaries with fiscal years ended November 30 changed to a
calendar-year basis (see Note D).
FOREIGN EXCHANGE - Results of operations for foreign subsidiaries, other than
those located in highly inflationary countries, are translated using the
average exchange rates during the period, while assets and liabilities are
translated into U.S. dollars using current rates. Resulting translation
adjustments are recorded as currency translation adjustments in shareholders'
equity. For subsidiaries in highly inflationary countries, currency gains and
losses resulting from translation and transactions are determined using a
combination of current and historical rates and are reported directly in the
earnings statement.
INVENTORIES - Inventories are valued at the lower of cost or market. Cost is
determined by the last-in, first-out (LIFO) method for substantially all
domestic inventories and the first-in, first-out (FIFO) method for foreign
inventories.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are carried at
cost. Depreciation is computed principally on the straight-line method for
financial reporting, while accelerated methods are used for income tax
purposes. Maintenance and repair costs are charged to earnings as incurred.
Costs of renewals and improvements are capitalized. Upon retirement or other
disposition of property, any gain or loss is included in earnings.
INCOME TAXES - In accordance with SFAS No. 109, the company applies an asset
and liability approach to accounting for income taxes. Deferred tax
liabilities and assets are recognized for the expected future tax consequences
of temporary differences between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. The company provides deferred income
taxes on subsidiaries' earnings that are not considered to be permanently
invested in those subsidiaries.
CASH EQUIVALENTS - The company considers all highly liquid debt instruments
with an original maturity of three months or less to be cash equivalents.
STATEMENTS OF CASH FLOW - The company does not restate the Statements of Cash
Flows for operations that have been discontinued.
INVESTMENTS - The company has investments in short- and long-term debt
securities that have been classified under the provisions of SFAS No. 115 as
held-to-maturity. Accordingly, these investments are measured at amortized
cost and temporary unrealized gains or losses are not recognized.
DERIVATIVE FINANCIAL INSTRUMENTS - Forward exchange contracts are used to hedge
net transaction exposures and are marked-to-market with the resulting gains and
losses recognized in earnings. Purchased foreign currency options are used to
hedge anticipated transactions and realized and unrealized gains and losses are
deferred and included as a component of the related transaction. The carrying
values of derivative financial instruments are generally reported with other
current assets or other current liabilities.
OTHER - Certain reclassifications have been made to conform prior years' data
to the current presentation including certain deferred income tax balances.
B. DISCONTINUED OPERATIONS
In December 1994, the company sold its interests in the Asgrow Seed Company.
The sale represents complete divestiture of all operations in the agronomic and
vegetable seed businesses. A loss of $997, after provisions for tax, was
realized on the sale, including accruals for certain retained liabilities.
<PAGE> 16
In December 1993, the company sold the assets of Asgrow Florida Company. The
sale represented complete divestiture of the company's operations in the
agricultural chemical business. The gain on the sale, amounting to $4,926
after provisions for tax, included accruals for certain retained liabilities.
Operating results for the discontinued vegetable and agronomic seed and
agricultural chemical operations were:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
Period ended December 31 1994 1993 1992
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenue:
Agronomic and vegetable seeds $221,393 $274,215 $295,718
Agricultural chemicals 84,517 90,355
--------------------------------------------------------------------------------------------------------------
Total $221,393 $358,732 $386,073
--------------------------------------------------------------------------------------------------------------
Earnings before taxes and minority equity:
Agronomic and vegetable seeds $ 5,498 $ 10,385 $ 24,804
Agricultural chemicals 6,294 3,476
--------------------------------------------------------------------------------------------------------------
Income taxes:
Agronomic and vegetable seeds (2,500) (4,800) (7,400)
Agricultural chemicals (2,400) (700)
--------------------------------------------------------------------------------------------------------------
Minority equity in earnings (losses):
Agronomic and vegetable seeds 326 (527) (47)
--------------------------------------------------------------------------------------------------------------
Earnings from operations $ 2,672 $ 10,006 $ 20,227
--------------------------------------------------------------------------------------------------------------
Earnings per common share - primary $.01 $.09 $.12
--------------------------------------------------------------------------------------------------------------
</TABLE>
C. RESTRUCTURING
The company incurred restructuring charges in both 1993 and 1992. In the third
quarter of 1993, restructuring charges of $208,789 ($154,566 after tax) were
recorded to reflect the costs associated with a worldwide work-force reduction
of approximately 1,500 employees ($136,109); elimination or reduction of excess
manufacturing capacity in 14 plants worldwide over the next several years
($31,631); the write-down of certain intangibles ($19,000); facilities and
equipment ($17,095); and other ($4,954).
As of December 31, 1994, approximately 1,100 employees have left the company
under the 1993 restructuring program. Of the original accrual, approximately
$30,885 remains as a current liability. There have been no adjustments to the
liabilities originally accrued for work-force reduction.
In 1992, net restructuring charges of $22,055 ($13,387 after tax) were incurred
for a special voluntary early retirement program for employees in the U.S. and
Puerto Rico and for staff reductions in various international locations. As of
December 31, 1993, over 500 employees had terminated under the 1992
restructuring program and all amounts originally accrued have been paid to
participants.
D. ACCOUNTING CHANGES
During 1993 and 1992, the company adopted three accounting statements and made
one other accounting change. The effects of these changes on prior years were
reported as the cumulative effect of accounting changes (net of tax). The
changes were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
1993 1992
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Change in subsidiary reporting year $ 7,791 $
Adoption of: SFAS No. 112 11,115
SFAS No. 106 235,677
SFAS No. 109 (12,782)
--------------------------------------------------------------------------------------------------------------
Cumulative effect of accounting changes $18,906 $222,895
--------------------------------------------------------------------------------------------------------------
</TABLE>
Effective January 1, 1993, the company's subsidiaries that previously reported
on a fiscal year ending November 30 changed their reporting period to a
calendar-year basis. The change was made to accomplish more timely reporting
and to increase operating and planning efficiency. The results of operations
of these subsidiaries for the period December 1 through December 31, 1992,
constituted the accounting change that reduced after-tax earnings per share by
$.04. The cash flows of these subsidiaries for the thirteen-month period ended
December 31, 1993, are reflected in the Consolidated Statements of Cash Flows.
<PAGE> 17
The company also adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits," which pertains to benefits provided to former or
inactive employees after employment but before retirement. This change became
effective January 1, 1993. The cumulative effect of this change reduced
after-tax earnings per share by $.07.
Effective January 1, 1992, the company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which requires
accrual accounting for these benefits rather than cash-basis accounting. The
cumulative effect of this change reduced after-tax earnings per share by $1.33
(see Note T).
Also effective January 1, 1992, the company adopted SFAS No. 109, "Accounting
for Income Taxes," which had the cumulative effect of increasing after-tax
earnings per share by $.07 (see Note E).
E. INCOME TAXES
Earnings from continuing operations before income taxes and minority equity
were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
Years ended December 31 1994 1993 1992
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $533,096 $497,718 $624,595
Foreign 110,200 (17,681) 47,308
--------------------------------------------------------------------------------------------------------------
$643,296 $480,037 $671,903
--------------------------------------------------------------------------------------------------------------
</TABLE>
Income taxes on continuing operations consisted of:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
1994 1993 1992
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable:
Domestic $ 92,500 $106,901 $ 70,100
Foreign 38,500 44,400 31,900
State 5,500 15,400 9,100
--------------------------------------------------------------------------------------------------------------
136,500 166,701 111,100
-------------------------------------------------------------------------------------------------------------
Deferred:
Domestic 600 (49,600) 41,500
Foreign 15,400 (25,900) (4,500)
State 1,900 (7,000) (2,200)
--------------------------------------------------------------------------------------------------------------
17,900 (82,500) 34,800
--------------------------------------------------------------------------------------------------------------
$154,400 $ 84,201 $145,900
--------------------------------------------------------------------------------------------------------------
</TABLE>
Components of net deferred tax assets were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
December 31 1994 1993
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Taxed profit on intercompany transfers $ 32,628 $ 33,092
Employee benefit plans 47,627 47,833
Postretirement and postemployment benefits
other than pensions 148,685 154,031
Environmental and product accruals 105,034 105,889
Restructuring 15,496 38,935
Alternative minimum tax 41,645 23,307
All other 87,795 75,254
--------------------------------------------------------------------------------------------------------------
Total deferred tax assets
(net of valuation allowances) 478,910 478,341
--------------------------------------------------------------------------------------------------------------
Property, plant and equipment 156,927 150,589
Withholding taxes 73,189 69,689
Pension plans 57,784 47,583
All other 13,651 14,067
--------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 301,551 281,928
--------------------------------------------------------------------------------------------------------------
Net deferred tax assets $177,359 $196,413
--------------------------------------------------------------------------------------------------------------
</TABLE>
Deferred income taxes are included in the Consolidated Balance Sheets as
follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
December 31 1994 1993
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets $151,783 $161,569
Noncurrent assets 124,814 126,468
Noncurrent liabilities (99,238) (91,624)
--------------------------------------------------------------------------------------------------------------
Net deferred tax assets $177,359 $196,413
--------------------------------------------------------------------------------------------------------------
</TABLE>
Valuation allowances of $32,413 at December 31, 1994 and $28,239 at December
<PAGE> 18
31, 1993, were provided for deferred tax assets which are not likely to be
realized. They result primarily from the third-quarter 1993 restructuring and
other deferred tax assets at foreign locations.
Differences between the effective income tax rate and the U.S. statutory tax
rate were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
Percent of pretax income 1994 1993 1992
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 34.0%
Benefit of tax exemptions
in Puerto Rico (13.1) (22.5) (11.4)
Foreign earnings taxed at a
different effective rate 1.6 3.0 (1.3)
All other, net 0.5 2.0 0.4
--------------------------------------------------------------------------------------------------------------
Effective tax rate 24.0% 17.5% 21.7%
--------------------------------------------------------------------------------------------------------------
</TABLE>
The effective tax rate for 1993 was 22.0 percent, excluding the favorable tax
effect resulting from the third-quarter restructuring charges and other unusual
items.
A manufacturing subsidiary operates in Puerto Rico under a tax exemption grant,
expiring in 2009, which provides for partial exemption from Puerto Rico income
and property taxes. The grant, together with Internal Revenue Code Section
936, reduced income taxes by approximately $84,300 ($.49 per share) in 1994;
$108,000 ($.62 per share) in 1993; and $76,400 ($.43 per share) in 1992.
Deferred withholding taxes have been provided on accumulated earnings in Puerto
Rico. These taxes range from 3.5 percent to 10 percent and are payable when
dividends are remitted.
At December 31, 1994, undistributed earnings of foreign subsidiaries considered
permanently invested, for which deferred income taxes have not been provided,
were $377,352.
F. EARNINGS PER COMMON SHARE
Primary earnings per share are computed by dividing net earnings available to
holders of common stock by the sum of the weighted average number of shares of
common stock outstanding plus common share equivalents principally in the form
of employee stock option awards. Fully diluted earnings per share have been
computed assuming that all of the convertible preferred stock is converted into
common shares. Under this assumption, the weighted average number of common
shares outstanding is increased accordingly, and net earnings is reduced by the
amount of an incremental Employee Stock Ownership Plan (ESOP) contribution.
This incremental contribution is the net-of-tax difference between the income
the ESOP would have received on the preferred stock and the assumed dividend
yield to be earned on the common shares.
The number of shares used for computing primary and fully diluted earnings per
share was as follows (in thousands):
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
1994 1993 1992
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Primary 173,646 174,372 175,864
Fully diluted 181,111 181,775 183,285
---------------------------------------------------------------------------------------------------------------
</TABLE>
G. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
December 31 1994 1993
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Estimated replacement cost (FIFO basis):
Pharmaceutical and other finished products $216,165 $174,615
Raw materials, supplies and work in process 382,501 369,071
--------------------------------------------------------------------------------------------------------------
598,666 543,686
Less reduction to LIFO cost (139,990) (131,060)
---------------------------------------------------------------------------------------------------------------
Inventories $458,676 $412,626
--------------------------------------------------------------------------------------------------------------
</TABLE>
Inventories valued on the LIFO method had an estimated replacement cost (FIFO
basis) of $360,124 at December 31, 1994, and $310,906 at December 31, 1993.
<PAGE> 19
H. INVESTMENTS
Short- and long-term investments in debt securities, essentially all of which
are held by a subsidiary operating in Puerto Rico, were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Short-term investments held-to-maturity 1994 1993
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Obligations of the Commonwealth of Puerto Rico $ 56,475 $ 7,500
Bank certificates of deposit 122,500 25,000
Corporate commercial paper 14,000
Repurchase agreements 13,000
Obligations of corporations 10,000
Other 1,650 17
--------------------------------------------------------------------------------------------------------------
Total short-term investments $217,625 $32,517
--------------------------------------------------------------------------------------------------------------
</TABLE>
All short-term investments are reported on the Consolidated Balance Sheets as
"other current assets"; and since maturities of these instruments are within
one year, the carrying amount approximates fair value.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
1994 1993
----------------------------------------- ---------------------
Long-term investments AMORTIZED UNREALIZED FAIR Amortized Fair
held-to-maturity COST GAINS LOSSES VALUE Cost Value
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Guaranteed by the U.S.
Government $328,777 $1,965 $21,750 $308,992 $308,750 $320,696
Obligations of the
Commonwealth of
Puerto Rico 93,028 32 2,099 90,961 80,394 83,587
Obligations guaranteed
by various banks:
Notes and other
securities 65,000 34 2,520 62,514 35,000 35,657
Certificates of
deposit 160,287 533 3,564 157,256 200,287 210,412
Obligations of
corporations 10,000 10,673
--------------------------------------------------------------------------------------------------------------
Total long-term
investments $647,092 $2,564 $29,933 $619,723 $634,431 $661,025
--------------------------------------------------------------------------------------------------------------
</TABLE>
The unrealized losses at December 31, 1994 are considered temporary, as all
amounts are considered collectable upon maturity.
Scheduled maturities for the long-term securities held at December 31, 1994,
were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
Amortized Fair
Long-term securities mature in: Cost Value
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
One to five years $275,734 $269,965
Six to ten years 127,575 119,848
After ten years 10,858 10,122
--------------------------------------------------------------------------------------------------------------
414,167 399,935
Mortgage-backed securities 232,925 219,788
---------------------------------------------------------------------------------------------------------------
Total long-term investments $647,092 $619,723
--------------------------------------------------------------------------------------------------------------
</TABLE>
There were no sales of or transfers from securities classified as
held-to-maturity during the years ended December 31, 1994 or 1993.
I. LINES OF CREDIT AND LONG-TERM DEBT
The company completed a three-year revolving line of credit with six banks
during the year to support commercial paper borrowings and other corporate
purposes. All available domestic bank credit facilities at December 31, 1994,
totaling $150,000, were unused. These lines of credit do not require
compensating balances but are subject to various fees.
Total credit facilities available to various foreign subsidiaries at December
31, 1994, were $137,477, of which $99,172 were unused. The facilities are
subject to various fee and compensating balance arrangements.
Long-term debt consisted of the following:
<TABLE>
<S> <C> <C>
--------------------------------------------------------------------------------------------------------------
December 31 1994 1993
--------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 20
<TABLE>
<S> <C> <C>
7.5% Industrial Revenue Bonds due 2023 $ 40,000 $ 40,000
5.35-7.95% Medium-Term Notes due 1997-1999 266,000 266,000
5.875% Notes due 2000 200,000 200,000
Other 18,103 24,083
Current maturities (3,126) (3,246)
---------------------------------------------------------------------------------------------------------------
Total long-term debt $520,977 $526,837
--------------------------------------------------------------------------------------------------------------
</TABLE>
The Medium-Term Notes were issued under 1993 and 1991 shelf registrations filed
with the Securities and Exchange Commission. Pursuant to these registrations,
the company may from time to time issue notes with varying maturities, interest
rates, and amounts up to an aggregate total of $400,000 ($100,000 under the
1993 registration and $300,000 under the 1991 registration). At December 31,
1994, $34,000 remained available for issuance under the 1991 registration and
$100,000 under the 1993 registration.
Annual aggregate maturities of long-term debt during the four years subsequent
to 1995 are: 1996 - $5,278; 1997 - $29,579; 1998 - $158,465; and 1999 -
$82,288.
The company has guaranteed $275,000 of ESOP 9.79% notes due in 2004. Principal
payments begin in 1995, at which time they will constitute compensation expense
(see Note P). Annual aggregate maturities of guaranteed debt during the five
years subsequent to 1994 are: 1995 - $200; 1996 - $7,600; 1997 - $11,500; 1998
- $16,000; and 1999 - $22,000.
J. COMMITMENTS AND OTHER CONTINGENT LIABILITIES
Future minimum payments under noncancellable operating leases at December 31,
1994, approximately 70 percent real estate and 30 percent equipment, are: 1995
- $29,520; 1996 - $15,699; 1997 - $6,053; 1998 - $2,771; 1999 - $1,653; and
later years - $13,245.
Capital asset spending approved for construction and equipment but unexpended
at December 31, 1994, was approximately $179,800.
The company has committed to make a series of investments, as certain progress
goals are met, in a company that intends to manufacture a hemoglobin-based
oxygen carrier. These investments could aggregate $179,000 over a period of
years. As of December 31, 1994, the company has invested approximately
$70,000. Also, pursuant to the agreement, the company has committed to conduct
clinical development.
The Consolidated Balance Sheets also include accruals for estimated product and
environmental liabilities. The latter includes exposures related to
discontinued operations, including the industrial chemical facility at North
Haven, Conn., and several "Superfund" sites (see Note K).
Among the sites on the U.S. Environmental Protection Agency's (EPA) National
Priorities List, in connection with which the company has been identified as a
potentially responsible party, is the West KL Avenue Landfill located in
Kalamazoo County, Mich. The company has assumed lead responsibility for
remedial action. The costs of remediation may exceed a current estimate of
approximately $40,000 (in current dollars), of which other viable settling
parties are expected to contribute more than half. Necessary accruals have
been made for the company's share of estimated costs. Portions of the
company's payments could extend over the next 30 years.
K. LITIGATION
There are various legal proceedings against the company, including a
substantial number of product liability suits claiming damages as a result of
the use of the company's products including approximately 100 cases involving
HALCION.
A shareholder class action complaint against the company and certain of its
officers and directors is pending in the federal district court for Western
Mich. claiming damages resulting from alleged misrepresentations and omissions
of information by the company concerning HALCION. The court recently denied
plaintiff's motion to certify the action as a class action. Another action
makes a derivative claim that certain directors breached their fiduciary duty
<PAGE> 21
by allegedly failing to prevent improper practices during the clinical testing
of HALCION. Some portion of the liabilities and expenses associated with the
foregoing product liability actions may be covered by insurance, although such
matters are currently in litigation.
Another pharmaceutical company has sued the company for patent infringement
regarding the marketing of a nonprescription ibuprofen/pseudoephedrine
combination product, seeking injunction against further sales and treble
damages.
The company is also involved in several administrative and judicial proceedings
relating to environmental matters, including actions brought by the U.S. EPA
and state environmental agencies for cleanup at approximately 40 "Superfund" or
comparable sites.
The company's estimate of the ultimate cost to be incurred in connection with
these environmental situations could change due to cleanup procedures to be
employed, if any; the cost of cleanup; and the company's share of a site's
cost.
The company is a party, along with approximately 30 other defendant
manufacturers and wholesalers, in numerous state and federal civil antitrust
lawsuits brought by retail pharmacies. In the main, this series of actions
seeks treble damages and injunctive relief based on allegations of price
discrimination and price fixing with respect to the level of discounts and
rebates provided to certain favored customers but denied to the plaintiffs. It
is possible that additional cases making similar claims will be filed naming
the company as a defendant. The federal cases have been consolidated by and
transferred to the federal court for the Northern District of Illinois for
pre-trial proceedings. Various defense motions to dismiss and for summary
judgment have been denied. Discovery is in process.
Based on information currently available and the company's experience with
lawsuits of the nature of those currently filed or anticipated to be filed
which have resulted from business activities to date, the amounts accrued for
product and environmental liabilities arising from the litigation and
proceedings referred to above are considered to be adequate. Although the
company cannot predict the outcome of individual lawsuits, the ultimate
liability should not have a material effect on consolidated financial position;
and unless there is a significant deviation from the historical pattern of
resolution of such issues, the ultimate liability should not have a material
adverse effect on the company's results of operations or liquidity.
Studies directed toward a determination of a final remediation plan for the
site of the company's discontinued industrial chemical operations in North
Haven, Conn. are in process. Issues related to removal of a sludge pile
located on the site due to zoning violations have been resolved with the town.
The final plan of remediation of the pile will be worked out among the company,
the Connecticut Department of Environmental Protection, and the U.S. EPA with
input from the public. The company cannot at the present time predict the
final resolution of the sludge pile issue. Because the company believes
in-place closure of the sludge pile is the most responsible course of action
and the Connecticut Department of Environmental Protection and the U.S. EPA
have earlier approved the company's plan for in-place closure of the sludge
pile, which is substantially less expensive than removal, the company has not
established any reserves for the cost of off-site disposal. The company
believes that it has established sufficient reserves to cover the costs of
other remedial activities that may be required.
L. DERIVATIVE FINANCIAL INSTRUMENTS
The company utilizes derivative financial instruments in conjunction with its
foreign currency risk management programs and does not use such instruments for
trading purposes. These programs include the creation of designated hedges of
the net foreign currency transaction exposures of certain significant
international subsidiary operations. There were no hedges of anticipated
transactions at December 31, 1994.
The company's program to hedge net foreign currency transaction exposures is
designed to protect operating results and cash flows from potential adverse
effects of foreign currency fluctuations related to intercompany and selected
<PAGE> 22
third-party transactions. The hedging activities seek to limit this risk by
offsetting the gains and losses on the underlying exposures with losses and
gains on the instruments utilized to create the hedge. This program utilizes
over-the-counter forward exchange contracts with terms consistent with the
underlying exposures. These contracts generally have maturities that do not
exceed 12 months and require the company to exchange currencies at agreed-upon
rates at maturity.
At December 31, 1994, the notional amount of the company's outstanding foreign
exchange forward contracts held related to the net transaction exposure hedging
program was $171,318. Of these contracts, approximately 54 percent was
denominated in European currencies, 8 percent denominated in Australian
dollars, and 6 percent denominated in Japanese yen, all against the U.S.
dollar; and 32 percent denominated in Japanese Yen against various European
currencies. Maturities on these contracts extend through November 1995.
The counterparties to these contracts consist of a limited number of major
international financial institutions. The company does not expect any losses
from credit exposure due to review and control procedures established by
corporate policy.
M. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the company's financial
instruments were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
1994 1993
---------------------------------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Short-term investments and
current maturities of long-
term investments $217,625 $217,625 $ 32,517 $ 32,517
Foreign exchange forward
contracts 1,095 1,095 162 162
Long-term investments 647,092 619,723 634,431 661,025
Financial liabilities:
Short-term debt 42,090 42,090 35,628 35,628
Long-term debt 520,977 490,000 526,837 542,000
Guaranteed debt 274,800 293,000 275,000 333,000
---------------------------------------------------------------------------------------------------------------
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash, cash equivalents and accounts receivable - The carrying value
approximates fair value.
Short-term investments and current maturities of long-term investments - The
carrying values of instruments maturing within one year are considered to
approximate fair value because of the short maturities of those instruments.
These instruments are reported with other current assets.
Foreign exchange forward contracts - The fair value was estimated utilizing an
externally developed software module which incorporates foreign exchange rates
obtained from a quotation service. These contracts are reported with other
current assets.
Long-term investments - The fair value of long-term investments is based on
estimates received from brokers, by reference to a quotation service, and by
computations based on future cash flows that were applied individually to the
instruments as applicable.
Short-term debt and accounts payable - The carrying value approximates fair
value.
Long-term and guaranteed debt - The fair value was estimated by reference to
the public exchange market for the traded long- and medium-term securities of
the company. Estimates of fair value were utilized for other long-term debt.
<PAGE> 23
N. CONCENTRATIONS OF CREDIT RISK
The company invests excess cash in deposits with major banks throughout the
world and in high quality short-term liquid instruments. Such investments are
made only in instruments issued or enhanced by high quality financial
institutions (investment grade or better). Amounts invested in a single
institution are limited to minimize risk. The company has not incurred losses
related to these investments.
The company sells a broad range of pharmaceutical products to a diverse group
of customers operating throughout the world. In the U.S. and Japan, the
company makes substantial sales to relatively few large wholesale customers.
Credit limits, ongoing credit evaluation, and account monitoring procedures are
utilized to minimize the risk of loss. Collateral is generally not required.
O. SHAREHOLDERS' EQUITY
PREFERRED STOCK - The Series B Convertible Perpetual Preferred Stock is held by
The Upjohn Company Employee Stock Ownership Trust (ESOT). The per-share stated
value is $40,300, and the preferred stock ranks senior to the company's common
stock as to dividends and liquidation rights. Each share is convertible, at
the holder's option, into 1,000 shares of the company's common stock and has
voting rights equal to 1,000 shares of common. The company may redeem the
preferred stock at any time after July 20, 1999, or upon termination of the
ESOP at a minimum price of $40,300 per share. Dividends, at the rate of 6.25
percent, are cumulative, paid quarterly and charged against retained earnings.
COMMON STOCK - The number of common shares outstanding at December 31 was:
1994 - 173,141,727; 1993 - 173,431,918; and 1992 - 174,580,928. The number of
treasury shares acquired, net of shares issued for stock option, dividend
reinvestment, and employee benefit plans was: 1994 - 290,191; 1993 -
1,149,010; and 1992 - 632,213.
On a per-share basis, dividends were declared on common stock at the rate of
$1.48 in both 1994 and 1993 and $1.42 in 1992. Dividends payable were $64,060
and $64,170 at December 31, 1994 and 1993, respectively.
NOTE RECEIVABLE FROM ESOT - The note matures on February 1, 2005; bears
interest at 6.25 percent; and may be repaid, in whole or in part, at any time.
Accrued interest at the end of any calendar year shall be added to the note
principal.
ESOP DEFERRED COMPENSATION - Upon recognition of the company's guarantee of the
debt of the ESOT, an offsetting charge was made to shareholders' equity
referred to as "ESOP deferred compensation." To the extent the company
recognizes expense more rapidly than the corresponding cash contributions are
made, this balance will be reduced. The balance will also diminish to the
extent the company's ESOT debt guarantee commitment is reduced beginning in
1995 (see Notes I and P).
P. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The ESOP is a funding vehicle for the Upjohn Employee Savings Plan that covers
substantially all U.S. employees. As the ESOT makes debt principal and
interest payments, a proportionate amount of preferred stock is released for
allocation to plan participants. The preferred shares are allocated to
participants' accounts based upon their respective savings plan contributions
and the dividends earned on their previously allocated preferred shares. As of
December 31, 1994, 974.8 preferred shares had been released and allocated;
280.8 shares were released but unallocated; and 6,066.4 shares remained
unrealeased, of which 73.4 shares are committed to be released.
Under the agreement whereby the company has guaranteed the $275,000 of
third-party debt of the ESOT, the company is obligated to contribute sufficient
cash annually to the ESOT to enable it to make required principal and interest
payments. The company satisfies this annual cash flow requirement through
payment of dividends on all preferred shares outstanding plus cash
contributions. The company has fully and unconditionally guaranteed the
<PAGE> 24
ESOT's payment obligations whether at maturity, upon redemption, upon
declaration of acceleration, or otherwise. The holders of the debt securities
have no recourse against the assets of the ESOT except in the event that the
ESOT defaults on payments due and the company also fails to make such payments.
In that event, the holders may have recourse against unallocated funds held by
the ESOT. At December 31, 1994, assets of the ESOT consisted primarily of
$295,079 of Upjohn Company Series B Convertible Perpetual Preferred Stock.
Company expense is determined pursuant to the consensus position of the
Emerging Issues Task Force (Issue No. 89-8). A portion of future debt
principal payments is attributed to each year of the plan based on the number
of shares allocated during the period. This accelerated principal amount is
combined with debt interest and factored by 80 percent. From this
formula-driven amount, the company deducts interest earned on the note
receivable from the ESOT and dividends paid on all preferred stock held by the
ESOT to arrive at net ESOP expense.
Key measures of the ESOP were:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Years ended December 31 1994 1993 1992
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest expense of ESOT $28,895 $28,779 $28,669
Dividend income of ESOT 18,489 18,606 18,686
Company contribution to ESOT 8,001 7,870 7,511
Company ESOP expense (net) 13,368 12,344 11,972
--------------------------------------------------------------------------------------------------------------
</TABLE>
Q. EMPLOYEE STOCK OPTIONS
Employee stock options have a 10-year duration and are exercisable after one
year of employment following the grant date. At December 31, 1994, 808 current
and former employees held options for 9,860,994 shares, of which 8,090,464 were
exercisable. Options for 3,502,184 shares, 5,343,311 shares and 7,270,754
shares were available for future grants at December 31, 1994, 1993 and 1992,
respectively.
Under the plan, upon the stock-for-stock exercise of any nonqualified or
incentive stock options granted in 1991 or thereafter, an active employee will
receive a new, nonqualified "reloaded" stock option at the then-current market
price for the number of shares surrendered to exercise an option. The
"reloaded" stock option will have an exercise term equal to the time remaining
of the original exercised option. Officers subject to SEC Section 16(b) have a
four-year period before their shares become exercisable, while other
participants have a six-month waiting period.
Changes in outstanding options were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Option Price Number
Per Share of Shares
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance outstanding,
January 1, 1992 $ 7.88-46.13 5,863,407
Granted 30.00-45.19 1,901,929
Exercised 7.88-46.13 (319,237)
Canceled 30.88-45.19 (287,938)
------------------------------------------------------------------------------------------------------------
Balance outstanding,
December 31, 1992 $ 8.92-46.13 7,158,161
Granted 28.19-32.25 2,127,443
Exercised 8.92-31.75 (48,221)
Canceled 9.44-46.13 (486,955)
------------------------------------------------------------------------------------------------------------
Balance outstanding,
December 31, 1993 $ 9.44-46.13 8,750,428
Granted 28.63-35.94 1,927,721
Exercised 9.44-35.13 (275,693)
Canceled 9.44-46.13 (541,462)
------------------------------------------------------------------------------------------------------------
BALANCE OUTSTANDING,
DECEMBER 31, 1994 $12.33-46.13 9,860,994
------------------------------------------------------------------------------------------------------------
</TABLE>
R. SHAREHOLDER RIGHTS PLAN
Pursuant to the company's shareholder rights plan, each share of the company's
common stock includes one-third of a right. Each full right, which becomes
<PAGE> 25
exercisable 10 days after a shareholder has acquired 20 percent or more or
commenced a tender offer for 30 percent or more of the company's stock, will
entitle the holder to purchase stock at an exercise price of $400 having a
market value of $800. In lieu of cash payment, the company has the option to
exchange common stock for the rights. The rights are redeemable for $.05 per
right during a period up to 30 days after 20 percent or more of the company's
stock has been acquired. The rights will expire on June 26, 1996, unless
redeemed earlier by the company.
S. RETIREMENT BENEFITS
The company and its subsidiaries have various pension plans covering
substantially all employees. The following table summarizes the funded status
of these plans:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
December 31 1994 1993
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Vested benefit obligation $508,660 $ 564,599
------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation $575,444 $ 637,179
------------------------------------------------------------------------------------------------------------
Projected benefit obligation $816,316 $ 904,122
Plan assets at fair value 940,133 1,016,045
------------------------------------------------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 123,817 111,923
Unrecognized net losses 78,456 64,856
Unamortized net asset at adoption (85,579) (96,753)
Unrecognized prior service cost 44,250 52,843
------------------------------------------------------------------------------------------------------------
Prepaid pension cost $160,944 $ 132,869
------------------------------------------------------------------------------------------------------------
</TABLE>
The U.S. plans comprise the majority of the amounts reflected above. The 1993
early retirement inducement caused a higher-than-normal payout of lump-sum
benefits in 1994, diminishing the projected benefit obligation as well as plan
assets. Further reducing the projected benefit obligation was the increase at
year end of the discount rate in the U.S. to 8.5 percent from 7.5 percent. The
assets of the domestic plans are invested approximately two-thirds in equity
securities. Fair value is determined principally by reference to publicly
quoted year-end prices. Accrued unfunded foreign separation pay plans not
reflected in the funded status summary above totaled $14,300 and $14,000 at
December 31, 1994 and 1993, respectively.
The consolidated net pension expense amounts reflected below are for continuing
operations and are exclusive of the added costs associated with early
retirement inducements offered in 1993 and 1992. These incremental charges of
$15,000 before tax in 1993 and $7,000 before tax, net of a settlement gain, in
1992 are included in restructuring costs. Also, as a result of the company's
divestiture of the Asgrow Seed Company in 1994, it recognized a $3,050 gain
related to the curtailment of the Asgrow Pension Plan. This curtailment gain
is reflected in the Consolidated Statement of Earnings as a component of the
loss on disposal of discontinued operations rather than in the data below.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Years ended December 31 1994 1993 1992
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits
earned during the year $43,362 $38,638 $35,011
Interest cost on projected
benefit obligation 61,565 58,749 55,916
Actual return on plan assets 10,623 (135,040) (57,925)
Net amortization and deferral (93,121) 57,082 (22,202)
------------------------------------------------------------------------------------------------------------
Net pension expense $22,429 $19,429 $10,800
------------------------------------------------------------------------------------------------------------
Assumptions used for net pension expense (U.S.):
------------------------------------------------------------------------------------------------------------
1994 1993 1992
------------------------------------------------------------------------------------------------------------
Discount rate 7.5 % 8.25% 8.25%
Salary growth rate 4.75% 5.5 % 5.5 %
Return on plan assets 9.5 % 9.5 % 9.5 %
------------------------------------------------------------------------------------------------------------
</TABLE>
T. OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The company provides nonpension benefits to eligible retirees and their
dependents, primarily in the form of medical and dental benefits.
<PAGE> 26
The following table summarizes the funded status of these plans:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
December 31 1994 1993
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Retirees $ 140,978 $ 168,468
Fully eligible active participants 10,250 10,832
Other active participants 158,006 167,292
----------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation 309,234 346,592
Plan assets at fair value 73,312 56,037
----------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit
obligation in excess of plan assets (235,922) (290,555)
Unrecognized net gains (81,079) (31,682)
Unrecognized prior service cost (52,216) (59,886)
----------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $(369,217) $(382,123)
----------------------------------------------------------------------------------------------------------
</TABLE>
The accumulated postretirement benefit obligation declined at December 31,
1994, due principally to an increase in the discount rate to 8.5 percent from
7.5 percent at December 31, 1993.
A Voluntary Employee Benefit Association (VEBA) or 501(c)(9) trust has been
established for the purpose of partially funding the company's obligations
under the plans. The funds are presently invested in long-term securities.
The fair value of plan assets was established by the trustee of the fund.
Future contributions are at the discretion of the company.
The composition of expense for the postretirement benefit plan is as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Years ended December 31 1994 1993 1992
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $11,305 $14,085 $14,605
Interest cost 24,585 30,825 30,607
Actual return on plan assets 766 (2,914) 1,369
Net amortization and deferral (10,064) (324) (2,469)
------------------------------------------------------------------------------------------------------------
26,592 41,672 44,112
Portion attributable to discontinued
operations (1,435) (2,294) (2,333)
------------------------------------------------------------------------------------------------------------
Net postretirement benefit cost,
continuing operations $25,157 $39,378 $41,779
------------------------------------------------------------------------------------------------------------
</TABLE>
The assumptions used to develop the net postretirement benefit cost are as
follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Years ended December 31 1994 1993 1992
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.5% 8.25% 8.25%
Return on plan assets 9.5% 9.5% 9.5%
Weighted average health care cost
trend rates:
Initially 7.7% 10.6% 11.1%
Trending down to 5.5% 6.0% 6.0%
------------------------------------------------------------------------------------------------------------
</TABLE>
The health care cost trend rate has a significant effect on the amounts
reported. For example, increasing the rate by one percentage point in each
year would increase the accumulated postretirement benefit obligation as of
December 31, 1994, by approximately $40,000 and the total of service and
interest cost components of net postretirement benefit cost for the year then
ended by approximately $5,600.
As a result of the company's divestiture of the Asgrow Seed Company in 1994, it
recognized a $7,750 gain related to the curtailment of its postretirement
benefit plan. This curtailment gain is reflected in the Consolidated
Statements of Earnings as a component of the loss on disposal of discontinued
operations.
The company adopted SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," effective January 1, 1993. The cumulative effect on earnings of
this change in accounting was a one-time charge of $18,000 or $11,115 after tax
($.07 per share). The incremental expense recognized for these benefits in
1993 and 1994 has not been material.
U. SEGMENT OPERATIONS
The company operates in one industry, Pharmaceutical Products, which includes
<PAGE> 27
prescription and nonprescription products for both humans and animals. No
single customer accounts for 10 percent or more of the company's consolidated
sales.
The table below shows the company's operations by geographic area. All the
sales are shown by the originating area. U.S. exports to third-party
customers are less than 10 percent. Sales to affiliates between geographic
areas are priced to reflect consideration of economic circumstances and the
regulations of countries in which the transferring entities are located. These
transfers, which are primarily human-use products from the U.S., are eliminated
in consolidation.
<TABLE>
<CAPTION>
Geographic areas for
----------------------------------------------------------------------------------------------------------
years ended December 31 1994 1993 1992
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES TO UNAFFILIATED CUSTOMERS
(INCLUDES EXPORTS):
United States $1,948,215 $2,150,778 $2,092,131
Europe 638,733 571,112 597,984
Japan and Pacific 425,790 394,741 353,919
Other foreign 262,258 223,326 212,154
----------------------------------------------------------------------------------------------------------
INTERAREA SALES TO AFFILIATES FROM:
United States 400,761 354,528 356,297
Europe 119,254 117,142 110,590
Japan and Pacific 2,245 2,559 1,201
Other foreign 12,715 10,627 10,205
Eliminations (534,975) (484,856) (478,293)
----------------------------------------------------------------------------------------------------------
$3,274,996 $3,339,957 $3,256,188
----------------------------------------------------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND MINORITY
EQUITY:
United States $ 533,096 $ 497,718 $ 624,595
Europe 43,705 (38,842) 10,757
Japan and Pacific 22,666 24,065 5,478
Other foreign 43,829 (2,904) 31,073
----------------------------------------------------------------------------------------------------------
$ 643,296 $ 480,037 $ 671,903
----------------------------------------------------------------------------------------------------------
Identifiable assets, December 31:
United States $3,867,905 $3,387,980 $3,085,793
Europe 650,193 570,723 617,199
Japan and Pacific 485,049 427,395 380,592
Other foreign 159,314 147,479 150,357
Discontinued operations (net) 278,344 279,158
----------------------------------------------------------------------------------------------------------
$5,162,461 $4,811,921 $4,513,099
----------------------------------------------------------------------------------------------------------
</TABLE>
V. FOREIGN OPERATIONS
The consolidated financial statements include amounts related to foreign
operations as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
December 31 1994 1993
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Working capital $490,618 $457,054
Net property and other assets 468,591 447,835
Noncurrent liabilities (97,507) (91,671)
Minority equity (5,017) (52,614)
----------------------------------------------------------------------------------------------------------
Equity in foreign net assets $856,685 $760,604
----------------------------------------------------------------------------------------------------------
</TABLE>
The reported value of and, potentially, the cash flow from foreign working
capital and net investments are subject to fluctuations in the value of the
U.S. dollar relative to the respective foreign currencies in which the net
assets are denominated.
Foreign exchange losses included in earnings, net of minority equity and taxes,
were ($29) in 1994; ($2,226) in 1993; and ($838) in 1992.
W. OTHER INFORMATION
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Years ended December 31 1994 1993 1992
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest cost incurred $36,703 $47,195 $42,261
Less: Capitalized on construction 12,103 15,699 11,008
----------------------------------------------------------------------------------------------------------
Interest expense $24,600 $31,496 $31,253
----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 28
<TABLE>
<S> <C> <C> <C>
Weighted average interest rate on short-
term borrowings at end of period
Domestic - - 3.6%
International 6.65% 8.4% 11.2%
----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 29
ELEVEN-YEAR SUMMARY OF CONTINUING OPERATIONS
The Upjohn Company and Subsidiaries
<TABLE>
<CAPTION>
ANNUAL GROWTH RATES - PERCENT Dollar amounts in millions, except per-share data
----------------------------- -----------------------------------------------------------------------------------
10-Year 5-Year
1985-1994 1990-1994 Years ended December 31 1994 1993
-------------------------- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING RESULTS:
8 6 Sales to domestic destinations $1,847.5 $2,046.5
10 8 Sales to foreign destinations 1,427.5 1,293.5
24 57 Other revenue 69.5 40.5
-------------------------------------------------------------------------------------------------------------------
9 7 Operating revenue 3,344.5 3,380.5
-------------------------------------------------------------------------------------------------------------------
7 9 Cost of products sold 843.1 783.6
9 8 Research and development 607.2 612.5
10 8 Marketing and administrative 1,294.8 1,316.1
Restructuring 208.8
-------------------------------------------------------------------------------------------------------------------
9 7 Operating costs and expenses 2,745.1 2,921.0
-------------------------------------------------------------------------------------------------------------------
8 5 Operating income 599.4 459.5
Nonoperating and minority interest 44.1 21.1
8 Provision for income taxes (154.4) (84.2)
-------------------------------------------------------------------------------------------------------------------
11 9 Earnings from continuing operations 489.1 396.4
Earnings (losses) from discontinued
operations 1.7 14.9
Cumulative effect of accounting changes
(net of tax) (18.9)
-------------------------------------------------------------------------------------------------------------------
11 23 Net earnings 490.8 392.4
Dividends on preferred stock
(net of tax) 12.3 12.1
-------------------------------------------------------------------------------------------------------------------
11 22 Net earnings on common stock $ 478.5 $ 380.3
-------------------------------------------------------------------------------------------------------------------
12 10 Primary earnings per share-continuing
operations after accounting changes $2.75 $2.09
11 24 Primary earnings per share-net earnings $2.76 $2.18
-------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION:
10 5 Trade accounts receivable, net $ 650.5 $ 653.5
6 10 Inventories 458.7 412.6
16 15 Other current assets 1,021.2 605.5
-------------------------------------------------------------------------------------------------------------------
11 10 Total current assets 2,130.4 1,671.6
Net assets of discontinued operations 278.3
10 8 Property, plant & equipment, net 1,798.7 1,700.9
11 25 Other assets 1,233.4 1,161.1
-------------------------------------------------------------------------------------------------------------------
9 10 Total assets 5,162.5 4,811.9
9 8 Less: Current liabilities 1,118.9 993.1
8 25 Long-term and guaranteed ESOP debt 795.8 801.8
19 18 Other liabilities 865.2 931.3
-------------------------------------------------------------------------------------------------------------------
8 7 Shareholders' equity $2,382.6 $2,085.7
-------------------------------------------------------------------------------------------------------------------
COMMON STOCK DATA:
(1) (1) Common shares outstanding (thousands) 173,142 173,432
11 6 Number of common shareholders 46,622 46,681
13 9 Total common dividends paid $256.2 $257.7
8 8 Shareholders' equity per common share $13.76 $12.03
13 10 Dividends paid per common share $1.48 $1.48
-------------------------------------------------------------------------------------------------------------------
OTHER DATA:
(1) (1) Employees 16,900 17,400
8 2 Additions of property, plant & equipment $252.2 $311.6
Return on average equity-continuing
operations before accounting changes 21.9% 19.3%
-------------------------------------------------------------------------------------------------------------------
</TABLE>
Shares outstanding and per-share data reflect a
three-for-one stock split effective April 6,
1987, and a two-for-one stock split effective
April 7, 1986.
<PAGE> 30
<TABLE>
<CAPTION>
1992 1991 1990 1989 1988 1987 1986 1985 1984
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$2,002.6 $1,878.9 $1,582.5 $1,388.8 $1,245.8 $1,158.9 $1,070.9 $ 935.4 $ 882.3
1,253.6 1,157.2 1,082.9 986.2 966.5 844.7 722.4 604.1 568.5
28.5 21.8 9.9 7.3 6.4 6.8 9.3 7.1 8.4
-----------------------------------------------------------------------------------------------------------------
3,284.7 3,057.9 2,675.3 2,382.3 2,218.7 2,010.4 1,802.6 1,546.6 1,459.2
-----------------------------------------------------------------------------------------------------------------
754.5 668.5 620.5 546.7 520.5 491.5 486.6 439.3 419.6
553.3 496.9 431.7 411.5 386.4 363.2 318.9 288.8 250.9
1,292.2 1,205.4 1,032.2 901.7 816.2 736.2 642.7 544.9 517.5
22.0 5.0 (36.6) 55.8
-----------------------------------------------------------------------------------------------------------------
2,622.0 2,375.8 2,047.8 1,915.7 1,723.1 1,590.9 1,448.2 1,273.0 1,188.0
-----------------------------------------------------------------------------------------------------------------
662.7 682.1 627.5 466.6 495.6 419.5 354.4 273.6 271.2
10.2 9.6 (6.7) .9 (2.1) (12.2) (17.5) (14.3) (33.4)
(145.9) (170.2) (184.9) (151.2) (140.9) (118.3) (95.8) (79.5) (69.6)
-----------------------------------------------------------------------------------------------------------------
527.0 521.5 435.9 316.3 352.6 289.0 241.1 179.8 168.2
20.2 15.9 19.8 (140.3) .8 16.0 11.5 23.2 5.1
(222.9)
-----------------------------------------------------------------------------------------------------------------
324.3 537.4 455.7 176.0 353.4 305.0 252.6 203.0 173.3
12.1 12.3 12.4
-----------------------------------------------------------------------------------------------------------------
$ 312.2 $ 525.1 $ 443.3 $ 176.0 $ 353.4 $ 305.0 $ 252.6 $ 203.0 $ 173.3
-----------------------------------------------------------------------------------------------------------------
$ 1.66 $ 2.87 $ 2.36 $ 1.70 $ 1.89 $ 1.53 $ 1.29 $ .97 $ .91
$ 1.78 $ 2.96 $ 2.47 $ .95 $ 1.89 $ 1.61 $ 1.35 $ 1.10 $ .94
-----------------------------------------------------------------------------------------------------------------
$ 698.5 $ 625.0 $ 563.7 $ 505.2 $ 492.3 $ 414.3 $ 383.7 $ 288.1 $ 242.9
389.5 355.8 312.5 282.3 274.0 265.2 239.0 256.3 263.6
557.0 470.4 527.5 511.6 489.9 587.8 388.2 399.8 234.0
-----------------------------------------------------------------------------------------------------------------
1,645.0 1,451.2 1,403.7 1,299.1 1,256.2 1,267.3 1,010.9 944.2 740.5
279.1 270.5 252.3 230.7 249.1 239.0 202.6 199.6 260.3
1,596.1 1,469.2 1,349.0 1,205.7 1,144.3 1,023.4 899.4 774.7 692.8
992.9 863.0 573.8 401.6 386.9 410.7 471.8 382.7 448.5
-----------------------------------------------------------------------------------------------------------------
4,513.1 4,053.9 3,578.8 3,137.1 3,036.5 2,940.4 2,584.7 2,301.2 2,142.1
1,063.2 970.7 775.4 758.4 668.3 590.3 493.2 459.7 474.3
677.9 570.5 549.6 256.4 257.3 435.0 421.9 376.2 382.0
756.5 507.5 474.2 386.2 290.0 241.6 199.4 170.2 151.6
-----------------------------------------------------------------------------------------------------------------
$2,015.5 $2,005.2 $1,779.6 $1,736.1 $1,820.9 $1,673.5 $1,470.2 $1,295.1 $1,134.2
-----------------------------------------------------------------------------------------------------------------
174,581 175,215 176,408 183,927 185,258 187,061 187,307 186,081 183,917
42,226 36,531 34,649 35,430 33,421 28,497 17,034 15,288 15,935
$ 243.5 $ 213.5 $ 178.8 $ 168.6 $ 141.5 $ 108.2 $ 92.6 $ 80.8 $ 78.2
$ 11.55 $ 11.44 $ 10.09 $ 9.44 $ 9.83 $ 8.95 $ 7.85 $ 6.96 $ 6.17
$ 1.39 1.21 $ 1.00 $ .91 $ .76 $ .58 $ .50 $ .44 $ .43
-----------------------------------------------------------------------------------------------------------------
17,700 17,800 17,200 17,600 18,100 18,300 18,400 18,400 18,000
$ 285.2 $ 268.3 $ 236.4 $ 228.5 $ 225.8 $ 201.7 $ 190.4 $ 137.7 $ 116.7
26.2% 27.6% 24.8% 17.8% 20.2% 18.4% 17.4% 14.8% 15.4%
-----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 31
QUARTERLY DATA
The Upjohn Company and Subsidiaries
Dollars in millions, except per-share data
<TABLE>
<CAPTION>
QUARTERLY DATA (Unaudited) 1994 1993
--------------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH First Second Third Fourth
QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $800.7 $818.7 $809.2 $846.5 $800.7 $831.4 $852.6 $855.4
Other revenue 10.3 14.2 19.5 25.5 6.0 9.1 9.6 15.8
--------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUE 811.0 832.9 828.7 872.0 806.7 840.5 862.2 871.2
--------------------------------------------------------------------------------------------------------------------------
Cost of products sold 202.7 217.8 214.3 208.3 187.6 195.3 195.2 205.6
Research and development 154.8 148.3 146.7 157.4 142.8 158.1 158.8 152.8
Marketing and administrative 301.5 316.5 302.0 374.8 313.6 324.2 343.2 335.1
Restructuring 208.8
--------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 152.0 150.3 165.7 131.5 162.7 162.9 (43.8) 177.7
Interest income 13.2 14.1 15.1 17.2 12.2 12.4 13.1 13.1
Interest expense (6.4) (6.3) (6.6) (5.3) (8.7) (9.4) (7.6) (5.8)
Foreign exchange (losses)
gains (1.7) (.4) 1.1 (.1) (1.9) (.3) (2.0) (.4)
All other, net .1 (.7) 10.1 .4 12.2 (2.6) (4.3) .5
--------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSSES) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES AND
MINORITY EQUITY 157.2 157.0 185.4 143.7 176.5 163.0 (44.6) 185.1
Provision for income taxes 35.5 37.0 45.8 36.1 38.2 39.8 (22.6) 28.7
Minority equity in (losses)
earnings (2.2) 1.9 (.3) .4 (.7) (.3) (.4) .9
--------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) FROM
CONTINUING OPERATIONS 123.9 118.1 139.9 107.2 139.0 123.5 (21.6) 155.5
--------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from
discontinued operations
(net of tax) 10.9 2.0 (5.7) (5.5) 13.4 1.8 (8.5) 8.2
--------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE
CUMULATIVE EFFECT OF
ACCOUNTING CHANGES 134.8 120.1 134.2 101.7 152.4 125.3 (30.1) 163.7
--------------------------------------------------------------------------------------------------------------------------
Cumulative effect of
accounting changes
(net of tax) (18.9)
--------------------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) 134.8 120.1 134.2 101.7 133.5 125.3 (30.1) 163.7
Dividends on preferred stock
(net of tax) 3.0 3.1 3.0 3.2 3.0 3.1 3.0 3.0
--------------------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) ON
COMMON STOCK $131.8 $117.0 $131.2 $ 98.5 $130.5 $122.2 $(33.1) $160.7
--------------------------------------------------------------------------------------------------------------------------
NET EARNINGS PER COMMON SHARE:
Primary
- Earnings (loss) before
accounting changes $.70 $.66 $.79 $.60 $.78 $.69 $(.14) $.87
- Discontinued operations .06 .01 (.03) (.03) .08 .01 (.05) .05
- Cumulative effect of
accounting changes (.11)
--------------------------------------------------------------------------------------------------------------------------
Primary - Net earnings (loss) $.76 $.67 $.76 $.57 $.75 $.70 $(.19) $.92
--------------------------------------------------------------------------------------------------------------------------
Fully diluted -
Earnings (loss) before
accounting changes $.68 $.64 $.76 $.59 $.75 $.67 $(.14) $.85
- Discontinued operations .06 .01 (.03) (.03) .08 .01 (.05) .04
- Cumulative effect of
accounting changes (.10)
--------------------------------------------------------------------------------------------------------------------------
Fully diluted -
Net earnings (loss) $.74 $.65 $.73 $.56 $.73 $.68 $(.19) $.89
--------------------------------------------------------------------------------------------------------------------------
DIVIDENDS DECLARED PER SHARE $.37 $.37 $.37 $.37 $.37 $.37 $.37 $.37
--------------------------------------------------------------------------------------------------------------------------
MARKET PRICE:
High 303/8 335/8 371/8 351/4 323/4 311/4 295/8 35
Low 261/4 253/4 285/8 293/8 26 273/4 255/8 28
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Jurisdiction
in which
Corporate Name Incorporated
---------------------------
THE UPJOHN COMPANY Delaware (Parent)
Subsidiaries (excluding those which when
----------------------------------------
considered in the aggregate as a single
---------------------------------------
subsidiary did not constitute a significant
-------------------------------------------
subsidiary as of December 31, 1994):
------------------------------------
The Upjohn Holding Company M Delaware
The Upjohn Manufacturing Company Delaware
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to incorporation by reference in the prospectus included in Form
S-3 Registration Statement (No. 33-31641); the prospectus in Form S-3
Registration Statement (No. 33-42210); the prospectus in Form S-3 Registration
Statement (No. 33-60304); the prospectus included in Form S-8 Registration
Statement (No. 33-14461), as amended and supplemented; the prospectus included
in Form S-8 Registration Statement (No. 33-150121); and in the Form S-8
Registration Statement (No. 33-51659) of our reports dated January 26, 1995, on
our audits of the consolidated financial statements and financial statement
schedules of The Upjohn Company and its subsidiaries as of December 31, 1994
and 1993 and for the years ended December 31, 1994, 1993 and 1992, which is
incorporated by reference into this Form 10-K for the fiscal year ended
December 31, 1994 of The Upjohn Company.
COOPERS & LYBRAND, L.L.P.
Chicago, Illinois
March 30, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 502,346
<SECURITIES> 0
<RECEIVABLES> 686,610
<ALLOWANCES> 36,088
<INVENTORY> 458,676
<CURRENT-ASSETS> 2,130,438
<PP&E> 3,079,537
<DEPRECIATION> 1,280,866
<TOTAL-ASSETS> 5,162,461
<CURRENT-LIABILITIES> 1,118,940
<BONDS> 520,977<F1>
<COMMON> 190,590
0
295,079
<OTHER-SE> 1,896,949
<TOTAL-LIABILITY-AND-EQUITY> 5,162,461
<SALES> 3,274,996
<TOTAL-REVENUES> 3,344,538
<CGS> 843,152
<TOTAL-COSTS> 843,152
<OTHER-EXPENSES> 607,187<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,600
<INCOME-PRETAX> 643,296
<INCOME-TAX> 154,400
<INCOME-CONTINUING> 489,088
<DISCONTINUED> 1,675
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 490,763
<EPS-PRIMARY> 2.76
<EPS-DILUTED> 2.68
<FN>
<F1>Excludes company's guarantee of ESOP debt: $274,800
<F2>Only includes R&D expense.
</FN>
</TABLE>
